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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K405
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [No Fee Required]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-27590
SECURITY BANK HOLDING COMPANY
(Name of issuer in its charter)
Oregon 93-0800253
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
170 S. Second St., Coos Bay, Oregon 97420
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(Address of Principal Executive Offices) (Zip Code)
(541) 267-5356
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $5.00 par value
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Revenue for most recent fiscal year: $20,905,000
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Aggregate market value of voting Common Stock held by non-affiliates of
Registrant as of March 20, 2000: $24,722,158
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Number of shares of Common Stock, $5.00 par value, outstanding as of March 20,
2000: 4,914,942
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Documents incorporated by reference and parts of Form 10-K into which
incorporated: None
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Form 10-K Table of Contents
Page
Part I
Item 1. Description of Business 4-13
Item 2. Description of Property 13-14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for Common Equity and Related Stockholder Matters 14
Item 6. Selected Financial Data 15-17
Item 7. Management's Discussion and Analysis or Plan of Operation 18-27
Item 7a.Quantitative and Qualitative Disclosures About Market Risk 28-32
Item 8. Financial Statements 33-63
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 64
Part III
Item 10.Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 64-66
Item 11.Executive Compensation 67-70
Item 12.Security Ownership of Certain Beneficial Owners and
Management 71
Item 13.Certain Relationships and Related Transactions 72
Item 14.Exhibits and Reports on Form 8-K 73
Signatures 74
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion includes forward-looking statements within the meaning
of the "safe-harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on the beliefs of Security
Bank Holding Company's (the Company) management and on assumptions made by and
information currently available to management. All statements other than
statements of historical fact, regarding the Company's financial position,
business strategy and plans and objectives of management for future operations
of the Company are forward-looking statements. When used herein, the words
"anticipate," "believe," "estimate," "expect," and "intend" and words or phrases
of similar meaning, as they relate to the Company or management, are intended to
identify forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Forward-looking statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially from those indicated by the
forward-looking statements. These risks and uncertainties include the Company's
ability to maintain or expand its market share, net interest margins, or
implement its marketing and growth strategies. Further, actual results may be
affected by the Company's ability to compete on price and other factors with
other financial institutions; customer acceptance of new products and services;
general trends in the banking industry and the regulatory environment, as they
relate to the Company's cost of funds and returns on assets. In addition, there
are risks inherent in the banking industry relating to collectibility of loans
and changes in interest rates. The reader is advised that this list of risks is
not exhaustive and should not be construed as any prediction by the Company as
to which risks would cause actual results to differ materially from those
indicated by the forward-looking statements.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
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Security Bank Holding Company ("SBHC" or "the Company"), incorporated in 1981,
is a multi-bank holding company registered under the Bank Holding Company Act of
1956. The administrative office of SBHC is located in Coos Bay, Oregon. SBHC was
organized as a holding company for its principa banking subsidiary, Security
Bank, a state chartered, FDIC insured commercial bank, through a reorganization
completed in April, 1983. Until 1996, SBHC conducted its business primarily
through Security Bank, but has recently embarked on a strategy to diversify
through investment in banking operations outside of Security Bank's primary
market area through wholly- and majority-owned subsidiaries. As part of that
strategy, the Company made the following recent investments:
o In 1996, the Company acquired a 68% controlling interest in Lincoln
Security Bank, a newly organized state-chartered commercial bank located
in Newport, Oregon,
o In 1997, the Company completed the acquisition of Pacific State Bank, a
wholly-owned state-chartered commercial bank located in Reedsport, Oregon,
o In 1998, the Company completed the spin-off of the former Brookings-Harbor
branch of Security Bank into Family Securit Bank, a newly organized,
wholly-owned state-chartered commercial bank,
o In 1998, the Company acquired a 66% controlling interest in McKenzie State
Bank, a newly organized state chartered commercial bank located in
Springfield, Oregon,
o In 1999, the Company acquired a 69% controllin interest in Oregon State
Bank a newly organized state chartered commercial bank located in
Corvallis, Oregon.
Security Bank, Lincoln Security Bank, Pacific State Bank, Family Security Bank,
McKenzie State Bank and Oregon State Bank are collectively referred to herein as
the "Banks".
SBHC has enjoyed growth and performance from its primary markets of Coos, Curry
and Douglas Counties. The population of, and employment in these counties, is
now growing, rebounding from significant declines during the late 1970's and
early 1980's when forest products production dropped precipitously. SBHC
believes that its success is attributable to its emphasis on personalized
customer service, its mix of innovative products tailored to the needs of its
local customers, and its identity of local community banks. To enhance this
success, SBHC has pursued strategic opportunities in markets beyond those which
it has historically served. For example, to diversify credit risks and generate
more loan demand, SBHC has opened mortgage banking offices in Bend and Tigard,
Oregon. The recent investments along the I-5 corridor in Oregon are expected to
further diversify the resources of the Company, and provide for further growth
in larger, more economically diverse communities.
SBHC compete directly with much larger commercial banks, each of which is a
subsidiary of a multi-state financial services company, operating in a number of
other markets, with more resources than SBHC. In order to compete effectively,
SBHC's subsidiary banks attempt to provide more personal customer service than
their competitors, and distinguish themselves as the local community bank of
choice in their respective markets. This marketing strategy has SBHC to enjoy
strong net interest margins. Through its subsidiary community banks, SBHC is
able to offer loan and deposit products specifically designed for the markets
served by each subsidiary. For example, Security Bank and Pacific State Bank
offers products intended to meet the needs of the increasing number of retirees
which constitute a high percentage of the new residents in Coos and Douglas
Counties. As a result of its business strategy, Security Bank has been the
fastest growing bank in its market since 1990, as measured by the rate of
increase in total deposits. Pacific State Bank dominates its market with a 63%
share.
<PAGE>
Security Bank
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Security Bank operated as a single office in Myrtle Point, Oregon, from it's
founding in 1919 until 1971, when the Coquille branch was opened. The bank's
Bandon Branch was opened in 1974. In 1977, Security Bank's fourth branch was
opened in the Bunker Hill area of Coos Bay, and in 1983, the bank merged with
Citizens Bank of North Bend, acquiring its fifth branch in North Bend. In 1985,
the sixth branch was opened as result of the purchase of the office and
assumption of the deposits of a failed institution in the Brookings-Harbor
community in Curry County. Also in 1985, Security Bank moved its headquarters to
downtown Coos Bay and opened its Coos Bay Mall branch. In 1998, the Company
completed the spin-off of the Brookings-Harbor branch of Security Bank to a
separate, wholly owned state chartered bank named Family Security Bank. In an
effort to continually provide new services, Security Bank established a Trust
department in 1998.
Security Bank operates in a competitive market, which has undergone significant
economic and demographic changes in the past two decades. During the period of
1979 to 1987, Coos and Curry Counties suffered the loss of large numbers of jobs
in the forest products industry. The employment losses led to a 10% population
decline in Coos County from 1980 to 1987. The loss of manufacturing workers and
their families, together with an influx of retirees as a result of the at-
tractiveness of the southern Oregon coast as a retirement location, has led to
a rebound of the population generally and a significant increase in the portion
of the population age 65 and older. The population over age 65 increased by
one-third from 1980 to 1998 to 17% of Coos County's total population, and
increased by almost two-thirds to 25% of Curry County's total population. Curry
County has the highest percentage of residents over age 65 of any Oregon county.
At the same time the economy has shifted to a more diverse base of activity,
including a greater role for small businesses.
The most direct competition faced by Security Bank comes from four large
commercial banks. With the recent acquisition of Western Bank by Washington
Mutual Bank, Security Bank has no community bank competitors, but continues to
compete with multi-state, multi-billion dollar asset institutions. To meet this
competition, Security Bank targets its marketing efforts on individuals and
small businesses who prefer personalized banking services, and has developed
products and services intended to meet the banking needs of people who are age
55 or over.
Lincoln Security Bank
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Lincoln Security is a state-chartered bank organized in 1996. Lincoln Security
was organized by a group of business and professional individuals in the Lincoln
County area as a locally owned commercial bank serving the needs of the city of
Newport, Oregon and Lincoln County, Oregon. The bank commenced operations on May
30, 1996. Lincoln Security engages in a general commercial banking business in
Lincoln County and offers commercial banking services to small and medium size
businesses, professionals and retail customers in the bank's market area.
SBHC facilitated the organization of Lincoln Security by purchasing 210,390
shares of Lincoln Security's Class B common stock, representing approximately
68% of the equity of Lincoln Security Bank. The remaining equity consists of
shares of Class A common stock owned by local investors. The shares of Class A
and Class B common stock are identical in all respects, except that the Class A
and Class B common stock vote as separate classes in the election of directors
with the Class B shares being entitled to vote for a number of directors
constituting a mere majority of the directors, and the Class A shares being
entitled to vote for the balance of the directors. Pursuant to a shareholders
agreement, the Class A common shareholders, under certain circumstances, have
the right to purchase all of the Class B common stock of Lincoln Security owned
by SBHC, after five years but before 10 years following the date of Lincoln
Security's charter. Conversely, SBHC has the right under certain circumstances
to acquire all of the then outstanding shares of Lincoln Security Class A common
stock. If SBHC were to acquire the Class A common stock in an exchange for newly
issued securities of SBHC, such a transaction would likely cause little or no
dilution to existing shareholders of SBHC. SBHC does not expect to receive
dividends on its shares of Class B common stock for the foreseeable future, as
any earnings of the bank are expected to be retained to fund further growth of
the bank.
<PAGE>
As a result of the ownership of a majority of Lincoln Security's outstanding
common stock, SBHC is able to control any corporate decisions requiring approval
of Lincoln Security shareholders. At this time, Mr. Brummel, Chairman and Chief
Executive Officer of SBHC, and Kenneth Messerle, a director of SBHC, are serving
on the Board of Directors of Lincoln Security, with the balance of the Board of
Directors being Lincoln County residents. SBHC believes that, like Security
Bank, the success of the bank depends on being identified as a local bank that
knows and understands the needs of the community it serves. Accordingly, SBHC
believes it is important that Lincoln Security have a majority of its board
members from the local community who are familiar with Lincoln County and are
known by the potential customers which the bank seeks to attract. The presence
of local shareholders, and the appointment of predominantly local, Lincoln
County directors, are expected to help ensure that Lincoln Security will have
the same community commitment and ties that distinguish Security Bank from its
larger statewide competitors. Although currently SBHC has only two repre-
sentatives on Lincoln Security's Board of Directors, SBHC expects to continue
to influence major decisions made by the Board. Further, it is anticipated
that Lincoln Security's management will continue to look to SBHC for guidance
in managing the administrative affairs of the bank. Nonetheless, Lincoln
Security officers oversee day-to-day operations of the bank without significant
involvement of SBHC.
Pacific State Bank
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Pacific State Bank is an Oregon commercial bank incorporated in November, 1962,
as Pacific Security Bank. The bank adopted its current name in 1989, and
conducts business from a single office in Reedsport, Oregon. Pacific State Bank
engages in a general commercial banking business in Douglas County and offers
commercial banking services to small and medium size businesses, professionals
and retail customers in their market area.
SBHC acquired Pacific State Bank in 1997. Pacific State Bank continues to
operate as a separate subsidiary bank, with a local Board of Directors.
Family Security Bank
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Family Security Bank is a state chartered commercial bank incorporated in May,
1998, through the spin-off of the former Brookings-Harbor branch of Security
Bank. This spin-off was intended to permit that branch to expand its local
market share by being the local community bank, rather than simply a branch of
another out-of-town financial institution. Family Security Bank engages in a
general commercial banking business in Curry County and offers commercial
banking services to small and medium size businesses, professionals and retail
customers in their market area.
McKenzie State Bank
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McKenzie State Bank is a state-chartered bank organized in 1998. McKenzie State
Bank was organized by a group of business and professional individuals in the
Lane County area as a locally owned commercial bank serving the needs of the
city of Springfield, Oregon and Lane County, Oregon. The bank commenced
operations on November 16, 1998. McKenzie State engages in a general commercial
banking business in Lane County and offers commercial banking services to small
and medium size businesses, professionals and retail customers in the bank's
market area.
SBHC facilitated the organization of McKenzie State by purchasing 250,000 shares
of McKenzie State's Class B common stock, and 13,560 shares of Class A common
stock, representing approximately 66% of the equity of McKenzie State Bank. In
1999, SBHC increased its ownership position to 68%. The remaining equity
consists of shares of Class A common stock owned by local investors. The shares
of Class A and Class B common stock are identical in all respects, except that
the Class A and Class B common stock vote as separate classes in the election of
directors with the Class B shares being entitled to vote for a number of
directors constituting a mere majority of the directors, and the Class A shares
being entitled to vote for the balance of the directors. There is no five-year
buy-out agreement at McKenzie State Bank as there is at Lincoln Security Bank.
SBHC does not expect to receive dividends on its shares of Class A and B common
<PAGE>
stock for the foreseeable future, as any earnings of the bank are expected to be
retained to fund further growth of the bank.
As a result of the ownership of a majority of McKenzie State's outstanding
common stock, SBHC is able to control any corporate decisions requiring approval
of McKenzie State shareholders. At this time, Mr. Brummel, Chairman and Chief
Executive Officer of SBHC, and Lou Lorenz, a director of Security Bank and
Pacific State Bank, are serving on the Board of Directors of McKenzie State,
with the balance of the Board of Directors being Lane County residents. SBHC
believes that, like all of its affiliate banks, the success of the bank depends
on being identified as a local bank that knows and understands the needs of the
community it serves. Accordingly, SBHC believes it is important that McKenzie
State have a majority of its board members from the local community who are
familiar with Lane County and are known by the potential customers which the
bank seeks to attract. The presence of local shareholders, and the appointment
of predominantly local Lane County directors are expected to help ensure that
McKenzie State will have the same community commitment and ties that distinguish
Security Bank from its larger statewide competitors. Although currently SBHC has
only two representatives on McKenzie State's Board of Directors, SBHC expects to
continue to influence major decisions made by the Board. Further, it is
anticipated that McKenzie State's management will continue to look to SBHC for
guidance in managing the administrative affairs of the bank. Nonetheless,
McKenzie State officers oversee day-to-day operations of the bank without
significant involvement of SBHC.
Oregon State Bank
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Oregon State Bank is a state-chartered bank organized in 1999. Oregon State Bank
was organized by a group of business and professional individuals in the Benton
County area as a locally owned commercial bank serving the needs of the city of
Corvallis, Oregon and Benton and Linn Counties. The bank commenced operations on
April 1, 1999. Oregon State engages in a general commercial banking business
serving Benton and Linn Counties and offers commercial banking services to small
and medium size businesses, professionals and retail customers in the bank's
market area.
SBHC facilitated the organization of Oregon State by purchasing 276,760 shares
of Oregon State's common stock, representing approximately 69% of the equity of
Oregon State Bank. The remaining equity consists of shares of common stock owned
by local investors. Oregon State Bank has only one class of common stock. There
is no five-year buy-out agreement at Oregon State Bank as there is at Lincoln
Security Bank. SBHC does not expect to receive dividends on its shares of common
stock for the foreseeable future, as any earnings of the bank are expected to be
retained to fund further growth of the bank.
As a result of the ownership of a majority of Oregon State's outstanding common
stock, SBHC is able to control any corporate decisions requiring approval of
Oregon State shareholders. At this time, Mr. Brummel, Chairman and Chief
Executive Officer of SBHC serves on the Board of Directors of Oregon State, with
the balance of the Board of Directors being Benton County residents. SBHC
believes that, like all of its affiliate banks, the success of the bank depends
on being identified as a local bank that knows and understands the needs of the
community it serves. Accordingly, SBHC believes it is important that Oregon
State have a majority of its board members from the local community who are
familiar with Benton and Linn Counties and are known by the potential customers
which the bank seeks to attract. The presence of local shareholders, and the
appointment of predominantly local Benton County directors are expected to help
ensure that Oregon State will have the same community commitment and ties that
distinguish Security Bank from its larger statewide competitors. Although
currently SBHC has only one representative on Oregon State's Board of Directors,
SBHC expects to continue to influence major decisions made by the Board.
Further, it is anticipated that Oregon State's management will continue to look
to SBHC for guidance in managing the administrative affairs of the bank.
Nonetheless, Oregon State officers oversee day-to-day operations of the bank
without significant involvement of SBHC.
<PAGE>
Security Mortgage:
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Security Mortgage is a department of SBHC which conducts mortgage-banking
activities. Security Mortgage sells residential real estate loans into the
secondary market, and in most cases retains the related servicing rights.
The servicing portfolio grew to $280 million at December 31, 1999, which will
provide ongoing servicing income and a source of new customers in the
foreseeable future. Security Mortgage has contributed between 20% and 25% of the
net earnings of the Company for the last several years. However, this
contribution is expected to decline as the new subsidiary banks increase in
size. In addition, increased interest rates tend to slow mortgage origination
activity.
See audited financial statements, footnote 19, for financial information by
segment.
Business Strategy
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SBHC seeks to achieve growth in its earning assets, while maintaining a strong
return on equity. The strategy for accomplishing those goals is based upon:
- Personalized Customer Service
- Development of Innovative Products
- Diversification into new Geographic Markets
- Leverage of "Back-Room" costs across all subsidiaries
PERSONALIZED CUSTOMER SERVICE. SBHC's banking subsidiaries pride themselves
on being community bank serving Western Oregon. The banks' personnel are
primarily long-time residents, with many years of banking experience in their
communities. In an era when larger competitors are minimizing personnel expenses
through the use of part-time tellers, centralized loan centers, and electronic
technology, the banks remain committed to serving customers through personal
service: loan officers and other employees who know and are known by their
customers. From the Boards of Directors, who are all resident and active members
of their respective communities, to branch tellers, service and accessibility
are emphasized. To enhance customer service, SBHC provides "platform banking,"
which gives employees computer access to customer records and allows them to
respond to inquiries efficiently.
To promote employee commitment to customer service, SBHC maintains an Employee
Stock Ownership Plan in which the majority of employees are eligible to
participate. The Plan enables employees to become shareholders of SBHC and share
a common interest with other shareholders. Thus, employees' efforts to improve
SBHC's performance provide an economic benefit to them through potential
increases in the value of their share ownership. SBHC also has established a
stock option plan for senior management personnel of the Holding Company and the
subsidiary banks.
INNOVATIVE PRODUCTS. SBHC seeks to increase market share through innovative
products oriented to the needs of potential customers. As many of the subsidiary
banks are still in the initial stages of business development, and therefore are
concentrating on basic services, these innovative products are made available to
all subsidiary banks through economies of scale within the larger organization.
Security Bank provides, for example, specially designed deposit and insurance
products for the population over age fifty-five, such as tax-deferred annuities
and a certificate of deposit which features a waiver of early withdrawal
penalties in the event the funds are needed for health care expenses. SBHC will
provide internet banking services starting fiscal 2000 for those who desire it,
and currently offers a telephone banking system which allows customers to access
their account information and obtain information about bank services by
telephone, 24-hours a day. During banking hours, however, employees answer
customer telephone calls to maintain personal contact rather than relying upon
computerized answering services. The banks also offer combination debit/ATM
cards, allowing customers worldwide direct debit and bank ATM network access.
<PAGE>
GEOGRAPHIC MARKET EXPANSION. SBHC is acting to diversify and expand its asset
base by moving outside of its traditional market areas without losing the
personal service and community focus which differentiate it from its
competitors. For example, SBHC has opened mortgage loan offices in Bend, and
Tigard, Oregon in addition to the main office in Coos Bay, Oregon.
Prior to the organization of Lincoln Security, SBHC had considered expanding its
market geographically through acquisitions or the opening of branch offices of
Security Bank in coastal communities north of its existing market area. SBHC
believed, and continues to believe, however, that retaining a community bank
identity is crucial to SBHC's success, and that branching beyond the existing
market would pose some risk to Security Bank's image as a local bank. SBHC
believes that organizing new community banks in cooperation with local business
people provides opportunities for expansion while retaining the benefits of
being identified as a local community bank.
SBHC's investment in Lincoln Security, McKenzie State and Oregon State is a
unique approach to partner with investors in a new market area, and reflects
SBHC's commitment to geographic market expansion. Management believes that these
investments, if successful, can be a model for investments in other community
banks. SBHC is currently investigating other communities that might present
attractive opportunities to organize new community banks.
In particular, SBHC has identified Roseburg, Oregon as a new market for
expansion and further diversification. It is anticipated the Company will
organize as new, wholly owned state chartered commercial bank in this community
in the first quarter of 2001. Currently, the Company is operating two branches
of Security Bank in this market and plans on transferring them to the new
Roseburg Bank in 2001.
LEVERAGE OF "BACK-ROOM" COSTS ACROSS ALL SUBSIDIARIES. Given the structure of
the Company with separate bank subsidiaries, SBHC will leverage the costs of the
"back-room" functions across all of its subsidiaries. "Back-Room" functions
include information technology, accounting, investment management human
resources, and loan processing. The costs of these functions are relatively
fixed at the Holding Company, and are not expected to increase exponentially as
the subsidiary banks grow in size. The goal is for each of the subsidiary banks
to focus on growing their businesses, while removing the burden of managing
these "back-room" functions from their day-to-day operations.
Economic Conditions and Demographics
- ------------------------------------
SBHC and its subsidiary banks primarily receive deposits and make loans in Coos,
Curry, Lincoln, Douglas, Lane, Linn and Benton Counties of Oregon. As community
banks, they have certain competitive advantages in their local focus, but are
also more closely tied to their respective local economies than competitors who
serve a number of geographic markets.
COMPETITION
The geographic areas of Oregon served by SBHC and its subsidiaries are highly
competitive with respect to both deposits and loans. SBHC competes principally
with commercial banks, savings and loan associations, credit unions, mortgage
companies, and other financial institutions. The major commercial bank
competitors are statewide institutions which are among the largest commercial
and savings banks. Each of these competitors is owned by multi-state,
multi-billion dollar holding companies. These banks have the advantages of
offering their customers services and state-wide banking facilities that SBHC
does not offer.
SBHC's primary competition for deposits comes from commercial banks, a savings
and loan association, credit unions, and money market funds, some of which may
offer higher rates than SBHC can offer. Secondary competition for funds comes
from issuers of corporate and government securities, insurance companies, mutual
funds, and other financial intermediaries. Other than with respect to large
certificates of deposit, SBHC competes for deposits by offering a variety of
deposit accounts at rates generally competitive with similar financial
institutions in the area.
<PAGE>
SBHC's competition for loans comes principally from commercial banks, savings
and loan associations, mortgage companies, finance companies, insurance
companies, and other institutiona lenders. Many of its competitors have
substantially higher lending limits than those of SBHC's subsidiaries,
individually or in the aggregate. SBHC competes for loan origination through the
level of interes rates and loan fees charged, the variety of commercial and
mortgage loan products, and the efficiency and quality of services provided to
borrowers. Lending activity can also be affected by the availability of lendable
funds, local and national economic conditions, current interest rate levels, and
loan demand. As discussed previously, SBHC and its subsidiaries compete with
their larger commercial bank competitors by emphasizing their community bank
orientation and efficient personal service to local customers, particularly
local lending.
SUPERVISION AND REGULATION
GENERAL
The Company and the Banks are extensively regulated under federal and state law.
These laws and regulations are intended to protect depositors, not shareholders.
To the extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory or regulatory provisions. Any change in applicable laws or regulations
may have a material effect on the business and prospects of the Company and the
Banks. The operations of the Company and the Banks may be affected by
legislative changes and by the policies of various regulatory authorities. The
Company is unable to predict the nature or the extent of the effects on its
business and earnings that fiscal or monetary policies, economic control or new
federal or state legislation may have in the future.
FEDERAL BANK HOLDING COMPANY REGULATION
The Company is a bank holding company within the meaning of the Bank Holding
Company Act ("BHCA"), and as such, it is subject to regulation, supervision and
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). The Company is required to file annual reports with the Federal
Reserve and to provide the Federal Reserve such additional information as the
Federal Reserve may require.
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company it, after
such acquisition, would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve will not approve any acquisition, merger or consolidation that would
have a substantial anti-competitive result, unless the anti-competitive effects
of the proposed transaction are clearly outweighed by a greater public interest
in meeting the convenience and needs of the community to be served. The Federal
Reserve also considers capital adequacy and other financial and managerial
factors in reviewing acquisitions or mergers.
With certain exceptions, BHCA also prohibits a bank holding company from
acquiring or retaining direct or indirect ownership or control of more than 5%
of the voting shares of any company which is not a bank or bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
of managing or controlling banks. In making this determination, the Federal
Reserve considers whether the performance of such activities by a bank holding
company can be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency in resources, which
can be expected to outweigh the risks of possible adverse effects such as
decreased or unfair competition, conflicts of interest or unsound banking
practices.
<PAGE>
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to the bank holding
company or its subsidiaries, on investments in their securities and on the use
of their securities as collateral for loans to any borrower. These regulations
and restrictions may limit the Company's ability to obtain funds from the Banks
for its cash needs, including funds for payment of dividends, interest and
operating expenses. Further, under the Federal Reserve Act and certain
regulations of the Federal Reserve, a bank holding company and its subsidiaries
are prohibited from engaging in certain types of arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
For example, the Bank may not generally require a customer to obtain other
services from the Bank or the Company, and may not require that the customer
promise not to obtain other services from a competitor, as a condition to an
extension of credit to the customer.
FEDERAL AND STATE BANK REGULATION
The Banks, as state-chartered banks with deposits insured by the Federal Deposit
Insurance Corporation ("FDIC"), are members of the Federal Reserve System, and
are subject to the supervision and regulation of the Director of the Oregon
Department of Consumer and Business Services, through the Division of Finance
and Corporate Securities ("Oregon Director"), and to the supervision and
regulation of the Federal Reserve Bank. These agencies may prohibit the Banks
from engaging in what they believe constitute unsafe or unsound banking
practices.
As of July 1, 1989, Oregon permits out-of-state banking institutions to acquire
banks or holding companies that have been in existence for a period of no fewer
than three years. Generally, such acquisitions are subject to the approval of
the Federal Reserve Board and the Oregon Director. As a result of 1993 Oregon
legislation and 1995 federal law changes, Oregon banks may merge with
out-of-state national or state banks, and out-of-state national and state banks
may acquire Oregon branches or may merger with or acquire branches of Oregon or
federal savings associations. Initial acquisitions must involve institutions
which have been engaged in banking in Oregon for at least three years, but once
such an acquisition is made, the resulting bank may add additional branches.
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve evaluates the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate-income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. Security Bank's current CRA rating is
"Outstanding," the highest rating awarded. Lincoln Security, Pacific State Bank,
Family Security Bank, McKenzie State Bank and Oregon State Bank all have
"Satisfactory" ratings.
The Banks are also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Banks are also subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in the
assessment of substantial civil monetary penalties on the affected bank or any
officer, director, employee, agent or other person participating in the conduct
of the affairs of that bank, the imposition of a cease and desist order, and
other regulatory sanctions.
<PAGE>
Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), each
Federal banking agency has established, by regulation, non-capital safety and
soundness standards for institutions under its authority. These standards cover
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, such other operational and managerial standards
as the agency determines to be appropriate, and standards for asset quality,
earnings and stock valuation. An institution which fails to meet these standards
must develop a plan acceptable to the agency, specifying the steps that the
institution will take to meet the standards. Failure to submit or implement such
a plan may subject the institution to regulatory sanctions. The Company believes
that the Banks meet all the standards, and therefore does not believe that these
regulatory standards materially affect the Company's business operations.
DEPOSIT INSURANCE
As FDIC member institutions, the deposits of the Banks are currently insured to
a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF"),
administered by the FDIC. The Banks are required to pay semiannual deposit
insurance premium assessments to the FDIC.
The FDICIA includes provisions to reform the Federal deposit insurance system,
including the implementation of risk-based deposit insurance premiums. The
FDICIA also permits the FDIC to make special assessments on insured depository
institutions in amounts determined by the FDIC to be necessary to give it
adequate assessment income to repay amounts borrowed from the U.S. Treasury and
other sources or for any other purpose the FDIC deems necessary. Pursuant to the
FDICIA, the FDIC implemented a transitional risk based insurance premium system
on January 1, 1993. Generally, under this system, banks are assessed insurance
premiums according to how much risk they are deemed to present to BIF. Banks
with higher levels of capital and a low degree of supervisory concer are
assessed lower premiums than banks with lower levels of capital or involving a
higher degree of supervisory concern.
DIVIDENDS
The principal source of the Company's cash inflow is dividends received from
Security Bank and Pacific State Bank, the two largest subsidiary banks. Lincoln
Security Bank, Family Security Bank, McKenzie State Bank and Oregon State Bank
do not currently pay dividends and are not expected to in the near future, as
earnings will be retained to fund future growth. Under the Oregon Bank Act, the
Banks are subject to restrictions on their payment of cash dividends to the
Company. A bank may not pay cash dividends if that payment would reduce the
amount of its capital below that necessary to meet minimum applicable regulatory
capital requirements. Under Federal Reserve Bank regulations, the Banks are not
permitted to pay dividends in any consecutive three-year period in excess of net
income for the same three-yea period. In addition, the amount of the dividend
may not be greater than its net undivided profits then on hand, after first
deducting (i) all losses; (ii) all bad debts, unless the debts are well-secured,
(a) on which interest for a period of one year is past due and unpaid, and (b)
upon which final judgment has been obtained, but for more than one year the
judgment has been unsatisfied and interest has not been paid; (iii) all assets
or depreciation charged off as required by the Oregon Director; and (iv) all
accrued expenses, interest and taxes of the bank.
Family Security Bank, McKenzie State Bank and Oregon State Bank, as part of
their organization and membership in the Federal Reserve System, are required to
maintain a minimum Tier 1 leverage ratio for the first three years of operations
of 7%, 9% and 9%, respectively.
In addition, the appropriate regulatory authorities are authorized to prohibit
banks and bank holding companies from paying dividends which would constitute an
unsafe or unsound banking practice. The Banks and the Company are not currently
subject to any regulatory restrictions on their dividends other than those noted
above.
<PAGE>
EMPLOYEES
As of December 31, 1999, SBHC and its subsidiaries had a total of 208 full-time
equivalent employees. None of the employees of SBHC or its subsidiaries are
subject to a collective bargaining agreement. SBHC and its subsidiaries consider
their relationships with their employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
SECURITY BANK MALL FACILITY. Security Bank's Mall Facility is located at 170
S.Second Street, Coos Bay, Oregon. The building and land are owned by the
bank. SBHC's consumer lending center and the Information Technology Department
occupy the first floor. SBHC's administrative offices occupy the second floor.
MYRTLE POINT BRANCH. Security Bank's original Main Office was located at 503
Spruce, Myrtle Point, Oregon. The building now serves as a branch of the bank,
which owns the building and land.
COQUILLE BRANCH. The Coquille Branch of Security Bank is located at 479 N.
Central, Coquille, Oregon. The building and land are owned by the bank.
BANDON BRANCH. The Bandon Branch of Security Bank is located at 1125 Hwy 101,
Bandon, Oregon. The building and land are owned by the bank.
BUNKER HILL. Located at 900 Hwy 101 South, Coos Bay, Oregon. The building and
land are owned by the bank. The Company's mortgage lending operation occupies
this facility.
NORTH BEND PROPERTY. The North Bend Branch of Security Bank is located at 2330
Broadway, North Bend, Oregon. The building and land are owned by the bank.
COOS BAY PROPERTY. The Coos Bay Branch of Security Bank is located at 700 S.
Broadway, Coos Bay, Oregon. The building and land are owned by the bank.
ROSEBURG PROPERTY. The Roseburg Branch of Security Bank is located at 567 SE
Jackson, Roseburg, Oregon. The building and land are leased from an
unaffiliated third party through July 2000, with an option to renew.
WINSTON PROPERTY. The Winston Branch of Security Bank is located at 4900
Grange, Roseburg, Oregon. The land is owned by the bank and a building owned
by the bank is currently under construction.
MORTGAGE LENDING OFFICES. SBHC has mortgage lending offices located at 2669
Twin Knolls Drive #201, Bend, Oregon and at 6950 S.W. Hampton St., Suite 100,
Tigard, Oregon. The Bend office is leased under a lease agreement which
expires July 31, 2001. The Tigard office is leased under a lease agreement
which expires June 30, 2002.
LINCOLN SECURITY BANK. Lincoln Security's principal office is located at 1250
North Coast Highway in Newport, Oregon, in a facility owned by the bank and
situated on land which is leased from an unaffiliated third party through
January 2011. The lease may be renewed by Lincoln Security for two additional
10-year periods. An additional branch is located at 355 NW Alder in Waldport,
Oregon. The land is owned by the bank and a temporary facility is currently
leased by the bank at that location.
PACIFIC STATE BANK. Pacific State's principal office is located at 1975
Winchester Avenue in Reedsport, Oregon. The building and land are owned by the
bank.
FAMILY SECURITY BANK. Family Security Bank's principal office is located at
16271 Hwy 101 South, Brookings, Oregon. The building and land are leased. The
lease expires in 2004. The bank also leases additional space for mortgage
<PAGE>
operations at the same address. In addition, a separate location for proof is
leased at 16209 West Hosfeldt, Unit B, Brookings, Oregon.
MCKENZIE STATE BANK. McKenzie State Bank's principal office is located at 52nd
and Main Place in Springfield, Oregon. The building and land are owned by the
Bank.
OREGON STATE BANK. Oregon State Bank's principal office is located at 415 NW 3rd
Avenue in Corvallis, Oregon. The building is owned by the bank and the land is
leased from an unaffiliated third party through November 2, 2028.
ITEM 3. LEGAL PROCEEDINGS
SBHC's subsidiary banks are from time to time a party to various legal actions
arising in the normal course of business. Management believes that there is no
threatened or pending proceedings against SBHC or the banks, which, if
determined adversely, would have a material effect on the business or financial
position of SBHC or the banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the NASDAQ National Market System under the symbol
"SBHC." The following lists the high, low and closing prices at the end of each
period presented. These amounts have been restated for the 5% stock dividend
issued August 1999 and the 5% stock dividend declared January 2000.
Fiscal 1997: High Low Close Cash dividend per share
- ----------- ---- --- ----- -----------------------
First Quarter...... $10.66 $7.71 $10.31 $0.10
Second Quarter..... $11.33 $9.98 $10.20 $0.00
Third Quarter...... $14.29 $10.20 $13.83 $0.10
Fourth Quarter..... $14.74 $11.11 $11.11 $0.00
Fiscal 1998:
- -----------
First Quarter...... $11.56 $9.98 $10.77 $0.18
Second Quarter..... $11.11 $8.73 $9.07 $0.00
Third Quarter...... $9.87 $8.68 $8.85 $0.18
Fourth Quarter..... $8.62 $6.71 $7.93 $0.00
Fiscal 1999:
- -----------
First Quarter...... $8.96 $7.82 $8.39 $0.18
Second Quarter..... $8.62 $7.49 $7.49 $0.00
Third Quarter...... $8.57 $6.72 $6.72 $0.00
Fourth Quarter..... $7.03 $5.18 $5.71 $0.00
As of March 20, 2000, the Common Stock was held of record by approximately 702
shareholders, a number which does not include beneficial owners who hold shares
in "street name."
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with Security Bank
Holding Company's consolidated financial statements and the accompanying notes
presented in this report. Share and per share data has been restated for the
5% stock dividend issued August 1999 and the 5% stock dividend declared January
2000.
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income.......................$20,905 $19,995 $20,091 $17,752 $15,933
Interest expense...................... 8,089 8,435 8,337 7,037 5,793
----- ----- ----- ----- -----
Net interest income before
provision......................... 12,816 11,560 11,754 10,715 10,140
Provision for loan losses............. 470 1,107 263 232 226
--- ----- --- --- ---
Net interest income............... 12,346 10,453 11,491 10,483 9,914
Non-interest income................... 5,201 4,968 3,869 3,476 2,423
Other non-interest expense............ 14,724 16,980 11,378 9,574 8,367
------ ------ ------ ----- -----
Income (loss) before income taxes and
minority interest................. 2,823 (1,559) 3,982 4,385 3,970
Provision for income taxes............ 869 25 1,247 1,353 1,167
--- -- ----- ----- -----
Income (loss) before minority interest 1,954 (1,584) 2,735 3,032 2,803
Net income attributable to minority
interest..................... 60 35 30 37 --
-- -- -- -- --
Net income (loss)..................... $2,014 $(1,549) $2,765 $3,069 $2,803
====== ======= ====== ====== ======
Per share data:
Basic income (loss) per share..... $.41 $(.31) $.62 $.7 $.73
==== ===== ==== === ====
Diluted income (loss) per share... $.41 $(.31) $.61 $.75 $.73
==== ===== ==== ==== ====
Cash dividends per share.......... $.18 $.36 $.20 $.18 $.13
Year end book value............... $5.84 $5.92 $6.30 $6.20 $5.39
Average common equivalent shares
Outstanding (basic).............4,914,684 4,905,065 4,486,525 4,450,063 4,187,776
Total assets.........................$316,601 $273,639 $270,232 $244,215 $211,181
Total deposits.......................$263,969 $226,795 $213,841 $193,964 $172,917
Total long-term borrowings...........$ -- $ -- $16,000 $17,208 $11,500
Net loans............................$184,102 $142,209 $136,035 $117,719 $104,291
Shareholders' equity..................$28,718 $29,032 $28,423 $25,323 $20,680
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA CONTINUED
<TABLE>
<CAPTION>
Year Ended
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial ratios:
Return on average assets.......... 69% -.57% 1.06% 1.35% 1.42%
Return on average equity.......... 7.00% -5.39% 10.40% 13.93% 15.46%
Average equity to assets.......... 9.81% 10.56% 10.20% 9.73% 9.16%
Cash Dividend yield............... 2.28% 3.27% 2.59% 2.73% 2.73%
Efficiency ratio.................. 81.72% 102.70% 72.80% 67.50% 66.60%
Net loans to assets............... 58.15% 51.97% 50.34% 48.20% 49.38%
Yield on earning assets........... 7.87% 8.04% 8.28% 8.37% 8.58%
Average rates paid................ 3.13% 3.53% 3.61% 3.48% 3.25%
Net interest spread............... 4.74% 4.51% 4.67% 4.89% 5.32%
Net interest margin............... 4.82% 4.65% 4.84% 5.05% 5.46%
Nonperforming assets to total assets 42% .26% .28% .21% .33%
Allowance for loan loss to total
loans............................. 1.39% 1.50% 1.00% 1.07% 1.14%
Allowance for loan loss to
nonperforming assets..............199.62% 319.05 189.02% 258.91% 277.31%
</TABLE>
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1999
Interest income...................... $4,744 $5,013 $5,414 $5,734
Interest expense..................... 1,856 1,891 2,086 2,256
----- ----- ----- -----
Net interest income before provision 2,888 3,122 3,328 3,478
Provision for loan losses............ 104 117 164 85
Non-interest income.................. 1,400 1,306 1,290 1,205
Other non-interest expense........... 3,282 3,544 3,810 4,088
----- ----- ----- -----
Income before income tax............. 902 767 644 510
Provision for income tax............. 302 286 222 59
--- --- --- --
Net income before minority
interest............................. 600 481 422 451
Net loss (income) attributable to
minority interest.................... 5 84 (3) (26)
- -- --- ---
Net income........................... $605 $565 $419 $425
==== ==== ==== ====
Income per common share (year to date):
Basic............................ $.13 $.24 $.32 $.41
Diluted.......................... $.13 $.24 $.32 $.41
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1998
Interest income...................... $4,917 $4,987 $5,075 $5,017
Interest expense..................... 2,011 2,044 2,090 2,290
----- ----- ----- -----
Net interest income before provision 2,906 2,943 2,985 2,726
Provision for loan losses............ 61 63 68 915
Non-interest income.................. 1,133 1,196 1,271 1,368
Other non-interest expense........... 3,184 3,050 2,960 7,786
----- ----- ----- -----
Income (loss) before income tax...... 794 1,026 1,228 (4,607)
Provision for income tax............. 284 365 373 (997)
--- --- --- -----
Net income (loss) before minority
interest............................. 510 661 855 (3,610)
Net (income) loss attributable to
minority interest.................... (9) (12) (20) 76
-- --- ---- --
Net income (loss).................... $501 $649 $835 $(3,534)
==== ==== ==== ========
Income (loss) per common share (year to date):
Basic............................ $.11 $.25 $.44 $(.31)
Diluted.......................... $.11 $.25 $.44 $(.31)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1997
Interest income...................... $4,620 $5,046 $5,210 $5,214
Interest expense..................... 1,880 2,114 2,193 2,149
----- ----- ----- -----
Net interest income before provision 2,740 2,932 3,017 3,065
Provision for loan losses............ 76 105 31 52
Non-interest income.................. 783 885 1,269 932
Other non-interest expense........... 2,565 2,640 3,067 3,106
----- ----- ----- -----
Income before income tax............. 882 1,072 1,188 839
Provision for income tax............. 285 357 361 243
--- --- --- ---
Net income before minority
interest............................. 597 715 827 596
Net loss attributable to
minority interest.................... 8 9 -- 13
- - -- --
Net income........................... $605 $724 $827 $609
==== ==== ==== ====
Income per common share (year to date):
Basic............................ $.14 $.30 $.49 $.62
Diluted.......................... $.14 $.30 $.49 $.61
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's consolidated financial condition and
results of operations should be read in conjunction with the selected
consolidated financial and other data, the consolidated financial statements,
and the related notes to the consolidated financial statements. In addition to
historical information, this report contains certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("PSLRA"). This statement is included for the express purpose of
availing the Company of the protections of the safe harbor provisions of the
PSLRA. The forward looking statements contained in this report are subject to
factors, risks, and uncertainties that may cause actual results to differ
materially from those projected. Important factors that might cause such a
material difference include, but are not limited to, those discussed in this
section of the report. In addition, the following items are among the factors
that could cause actual results to differ materially from the forward looking
statements in this report: general economic conditions, including their impact
on capital expenditures; business conditions in the banking industry; the
regulatory environment; new legislation; rapidly changing technology and
evolving banking industry standards; competitive standards; competitive factors,
including increased competition with community, regional and national financial
institutions; fluctuating interest rate environments; and similar matters.
Readers are cautioned not to place undue reliance on these forward looking
statements, which reflect management's analysis only as of the date of the
statement. The Company undertakes no obligation to publicly revise or update
this report. Readers should carefully review the risk factors described in this
and other documents of the Company filed from time to time with the Securities
and Exchange Commission.
The consolidated entity includes Security Bank Holding Company (the Company, or
SBHC), a bank holding company, its wholly-owned subsidiaries, Security Bank,
Pacific State Bank and Family Security Bank, and its majority owned
subsidiaries, Lincoln Security Bank, McKenzie State Bank, Oregon State Bank and
Security Bank's wholly-owned subsidiary Alland Inc. Collectively within this
document, the consolidated entity is referred to as the Company.
SUMMARY INCOME STATEMENTS
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Interest income....................... $20,905 $19,995 $20,091
Interest expense...................... 8,089 8,435 8,337
----- ----- -----
Net interest income before provision 12,816 11,560 11,754
Provision for loan losses............. 470 1,107 263
--- ----- ---
Net interest income................ 12,346 10,453 11,491
Non-interest income................... 5,201 4,968 3,869
Merger related expense................ - 10 253
ESOP compensation expense............. - 3,499 716
Other non-interest expense............ 14,724 13,471 10,409
------ ------- ------
Income (loss) before taxes and minority interest 2,823 (1,559) 3,982
Income taxes.......................... 869 25 1,247
---- -- -----
Income (loss) before minority interest 1,954 (1,584) 2,735
Loss attributable to minority interest 60 35 30
-- -- --
Net income (loss).................. $2,014 $(1,549) $2,765
====== ======== ======
Return on average assets.............. 0.69% -0.57% 1.06%
Return on average equity.............. 7.00% -5.39% 10.40%
Cash Dividend yield................... 2.28% 3.27% 2.59%
<PAGE>
YEAR ENDED DECEMBER 31, 1999 OVER 1998
GENERAL. The Company reported net income of $2,014,000 in 1999, as compared to a
net loss in 1998 of $1,549,000. In 1999, the Company commenced operations with
the new, majority owned subsidiary Oregon State Bank. The Company incurred a
loss of $276,000 associated with this de novo operation, which was expected
during the start-up stage of operations. In addition, the Company entered the
Salem, Oregon market with plans to open a new, wholly owned subsidiary to be
named Willamette Valley Bank (WVB). WVB was scheduled to begin operations in
February 2000. However, our results during the pre-opening stage fell short of
expectations, both in terms of initial loan production and attracting the talent
the Company needed to ensure success in the market. In December 1999, the
Company cancelled its expansion plans into Salem. As a result, the Company
incurred $282,000 in start up and exit costs in 1999 associated with WVB.
The net loss in 1998 is discussed in detail starting on page 20 of this annual
report, and resulted primarily from de-leveraging the Company's ESOP, increasing
the loan loss allowance and a change in accounting principal requiring the
write-off of organizational costs in the period incurred. Excluding these
adjustments, net income for 1998 would have been approximately $2,322,000.
Net income excluding the loss from OSB and the costs associated with WVB would
have been approximately $2,473,000, or $0.50 per share in 1999, compared to
$2,322,000 or $0.47 per share in 1998. This represents in an increase of
$151,000 or 7%.
The growth strategy of the Company through new de novo subsidiary banks has
resulted in decreased consolidated earnings during the start-up stages of these
operations. The Company currently has two subsidiary banks, Security Bank and
Pacific State Bank, that are contributing significant sustainable earnings. Two
other banks, Lincoln Security Bank and Family Security Bank, are contributing
earnings, but not yet at their long-term sustainable goals. McKenzie State Bank
has reached profitability on a monthly basis, and Oregon State Bank is expected
to generate monthly profits in the second half of fiscal 2000. The Company plans
on capitalizing a new, wholly-owned subsidiary to be named Roseburg Community
Banking Company in the first quarter of fiscal 2001. In 1999 the Company opened
a new branch of Security Bank in Roseburg, Oregon , and plans to open another
one in Winston, Oregon in the first half of fiscal 2000. These two branches are
operating under the assumed business name of Roseburg Community Banking Company.
In fiscal 2001, these two branches will be transferred from Security Bank to the
newly capitalized Roseburg Community Banking Company. The Company expects to
incur the majority of the start-up cost with these operations in fiscal 1999 and
fiscal 2000, thereby reducing the start-up impact upon capitalization of the new
bank in fiscal 2001.
In addition, the Holding Company has incurred increased costs associated with
the back-room functions during this rapid growth stage. However, the strategy of
the Company is to control the amount of back-room costs and leverage those costs
across the seven subsidiary banks, and increasing the efficiencies as the banks
grow in size.
As indicated later in the annual report, total loans and deposits increased 29%
and 16%, respectively, at December 31, 1999 as compared to December 31,1998.
This growth on the balance sheet has been greater than expectations, and is a
direct result of the growth strategy of the Company through de novo start-ups.
However, growth on the balance sheet typically comes before growth in earnings.
Growth in earnings is expected to increase in a similar fashion over the coming
few years.
NET INTEREST INCOME. Net interest income is the difference between interest
income (principally from loans and investment securities) and interest expense
(principally on customer deposits and borrowings.) Changes in net interest
income result from changes in volume, net interest spread, and net interest
margin. Volume refers to the average dollar level of interest earning assets and
interest bearing liabilities. Net interest spread refers to the differences
between the average yield on interest earning assets and the average cost of
interest bearing liabilities. Net interest margin refers to net interest income
divided by average interest earning assets. The Company's profitability, like
that of many financial institutions, is dependent to a large extent upon net
interest income. Since the Company tends to be asset sensitive, as interest
earning assets mature or reprice more quickly than interest bearing liabilities
in a given period, a significant decrease in the market rates of interest could
adversely affect net interest income. In contrast, an increasing interest rate
environment could favorably impact net interest income. Competition and the
economy also impact the Company's net interest income.
<PAGE>
Net interest income before the provision for loan losses increased $1,256,000 or
10.87% in 1999 as compared to 1998. Of the net increase of $1,256,000, an
increase in volume accounted for an increase in net interest income of
$1,743,000, while a decrease in spread accounted for a decrease in net interest
income of $487,000. Average interest earning assets increased $17.1 million,
while average interest bearing liabilities increased $19.4 million. The increase
in average interest earning assets and interest bearing liabilities resulted
from an increase in deposits resulting from the growth strategy of the Company,
offset by a decrease in borrowings from the Federal Home Loan Bank.
The average net interest spread increased from 4.51% to 4.74%, mainly due to
decreased average costing liability rates paid which declined 40 basis points
from 3.53% to 3.13%. The decrease in 1999 results from the overall decrease in
market interest rates, the increase in demand deposits from new markets and the
prepayment of FHLB advances in December 1998. Average earning asset yields have
decreased 17 basis points, from 8.04% in 1998 to 7.87% in 1999. The decrease in
earning asset yields resulted from the low/flat interest rate environment that
existed through the first three quarters of fiscal 1999. The Company's net
interest margin for 1999 was 4.82%, an increase of 17 basis points from 4.65%
for 1998. The Company expects the net interest margin to increase in the coming
years due to increases in the loan to deposit ratio as the growth strategy of
the Company continues.
PROVISION FOR LOAN LOSSES. Management's policy is to maintain an adequate
allowance for loan loss based on historical trends, current economic forecasts,
statistical analysis of the loan portfolio, as well as detailed review of
individual loans and current loan performance. The provision for loan losses was
$470,000 and $1,107,000 for 1999 and 1998, respectively. Net charge-offs were
$119,000 and $242,000 for 1999 and 1998, respectively. The allowance for loan
losses was $2,645,000 at December 31, 1999, as compared to $2,294,000 at
December 31, 1998. The Company's ratio of allowance for loan losses to total
loans was 1.39% at December 31, 1999, compared to 1.50% at December 31, 1998.
The Company increased the allowance for loan losses in the fourth quarter of
1998 to 1.50% to address regulatory recommendations. The loan loss allowance
ratio for the Company's peer group ranges from 1.20% to 1.50%. Regulatory
recommendations did not address specific loans within the Bank's portfolios, but
rather recommended the allowance be increased to more closely match the
Company's peer group. Prior to 1998, the Company maintained its allowance for
loan losses at approximately 1.00%
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $1,325,000 and $719,000 at December
31, 1999 and 1998, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred.
Management has in place a comprehensive loan approval process and an asset
quality monitoring system. Management continues its efforts to collect accounts
previously charged off and to originate loans of high quality. Management
believes the reserve for loan losses at December 31, 1999 is adequate to absorb
credit losses on specifically identified loans as well as estimated probable
credit losses inherent in the remainder of the portfolio. Further additions to
the reserve for loan losses could become necessary, depending upon the
performance of the Banks' loan portfolios or changes in economic conditions, as
well as growth within the loan portfolio and results of examinations by
regulators.
NON INTEREST INCOME. Non interest income increased $233,000, or 4.7%, in 1999 to
$5,201,000 as compared to $4,968,000 in 1998. Service charges on deposit
accounts increased $90,000, as overall deposit levels have increased. Gain on
sale of investment securities increased $164,000 from 1998, resulting from
non-recurring gains the Company had on restructuring the investment portfolio in
the first quarter of 1999. Loan servicing fees have increased $69,000, based on
the growth in loans serviced. Sold real estate loan fees have decreased $546,000
or 20%, in 1999 as compared to 1998, resulting from the increase in mortgage
rates. The Company benefited in 1998 as mortgage rates decreased and refinancing
activity increased. Other income has increased $456,000, or 57% from 1998,
resulting generally from a non-recurring gain on sale of the Company's credit
card portfolio in 1999 of $85,000. The Company had historically incurred a high
charge-off level with the credit card portfolio. The credit card portfolio was
small in comparison to the rest of the loan portfolio, and constantly faced
increased competitive pressures. Based on this, the Company sold the credit card
portfolio to an independent third party bank in the fourth quarter of 1999. The
remainder of the increase in other income results from the increased growth of
the subsidiary banks.
OTHER NON INTEREST EXPENSE. Other non interest expense increased 9.3% to
$14,724,000 in 1999 as compared to $13,471,000 in 1998. Salaries and employee
benefits, the largest non-interest expense, increased $992,000, or 13.5%.
Approximately $550,000 of this increase is related to the new subsidiaries
McKenzie State Bank and Oregon State Bank. The remaining increase results from
the continuing expansion activities of three of the other four subsidiary banks.
Pacific State Bank salary expense decreased $50,000 in 1999 over 1998, resulting
from the transfer of certain back-room functions to the Holding Company. In
addition, salary expense of the Holding Company decreased $128,000 in 1999 over
<PAGE>
1998, partially due to the decline in mortgage company operations based on the
increase in market interest rates.
Also included in other expense in 1999 is $282,000 of pre-opening and severance
costs associated with the Company's cancelled expansion plans into the Salem,
Oregon market.
PROVISION FOR INCOME TAXES. The provision for income taxes has increased
significantly from 1998, resulting from the overall net loss in 1998. The
company's effective tax rate for 1999 of 30.8% is less than the expected rate of
34%, resulting primarily due to the large level of municipal bond investments.
YEARS ENDED DECEMBER 31, 1998 OVER 1997
1997 ACQUISITION OF PACIFIC STATE BANK
In June 1997, the Company and Pacific State Bank (PSB) announced a definitive
agreement to merge in a stock-for-stock exchange. The transaction, accounted for
as a pooling of interests, was consummated on November 22, 1997, in an exchange
of 3.10 shares of SBHC common stock for each share of PSB common stock. There
were 1,261,31 shares of SBHC common stock issued for 406,875 shares of PSB
common stock. All prior period financial data has been restated to include PSB.
The acquisition of PSB was pursued due to their historical financial
performance, strong capital levels and their geographic location. PSB is located
on the Oregon coast, approximately 30 miles north of Coos Bay. As such, it was a
natural extension of the Company's franchise of community banks. PSB's
performance numbers (both Return on Equity and Return on Assets) will strengthen
those of the overall Company. Finally, the additional capital has enabled the
Company to pursue other aspects of its growth strategy.
GENERAL. The Company reported a net loss of $1,549,000 in 1998, as compared to
net income in 1997 of $2,765,000. The net loss in 1998 resulted from several
major adjustments, including the ESOP de-leverage, increasing the loan loss
reserves to 1.5% from 1.0% and the write-off of organizational costs in
accordance with a new accounting standard. In addition, as part of the Company's
growth strategy, the new de novo McKenzie State Bank opened in November 1998.
The Company recognized a $160,000 loss from McKenzie State Bank in 1998
resulting from start-up costs. The Company also identified equipment that was
non Year 2000 compliant and or going to be taken out of production early in
1999. This resulted in accelerating the depreciation of the carrying cost. In
addition, the Company incurred consulting fees in 1998 related to Year 2000
issues, resulting in a total expense of $160,000 recognized in 1998. Each of
these adjustments is discussed in detail within this report.
NET INTEREST INCOME. Net interest income before the provision for loan losses
decreased $194,000 or 1.65% in 1998 as compared to 1997. Of the net decrease of
$194,000, an increase in volume accounted for an increase in net interest income
of $1,028,000 while a decrease in spread accounted for a decrease in net
interest income of $1,222,000. Average interest earning assets increased $6.6
million, while average interest bearing liabilities increased $7.6 million. The
increase in average interest earning assets and interest bearing liabilities
resulted from an increase in deposits, offset by a decrease in borrowings from
the Federal Home Loan Bank of $16 million.
The average net interest spread decreased from 4.67% to 4.51%, mainly due to
decreased average earning asset yields which declined 24 basis points from 8.28%
to 8.04%. The low/flat interest rate yield curve has caused variable rate
repricing on assets over the period decreasing asset yields. In addition,
certain fixed rate loans and investments have refinanced/repriced at the lower
rates over the period. Average rates paid decreased 8 basis points to 3.53% in
1998 from 3.61% for 1997, primarily from a reduction in deposit cost, offset
partially by the early prepayment penalty of Federal Home Loan Bank borrowings.
The Company's net interest margin for 1998 was 4.65%, a decrease of 19 basis
points from 4.84% for 1997.
PROVISION FOR LOAN LOSSES. Management's policy is to maintain an adequate
allowance for loan loss based on historical trends, current economic forecasts,
statistical analysis of the loan portfolio, as well as detailed review of
individual loans and current loan performance. The provision for loan losses was
$1,107,000 and $263,000 for 1998 and 1997, respectively. Net charge-offs were
$242,000 and $170,000 for 1998 and 1997, respectively. The allowance for loan
losses was $2,294,000 at December 31, 1998, as compared to $1,429,000 at
December 31, 1997. The Company's ratio of allowance for loan losses to total
loans was 1.50% at December 31, 1998, compared to 1.00% at December 31,1997. The
<PAGE>
Company increased the allowance for loan losses in the fourth quarter of 1998 to
1.50% to address regulatory recommendations. The loan loss allowance ratio for
the Company's peer group ranges from 1.20% to 1.50%. Regulatory recommendations
did not address specific loans within the Bank's portfolios, but rather
recommended the allowance be increased to more closely match the Company's peer
group.
Non-performing assets (defined as loans on non-accrual status, 90 days or more
past due, and other real estate owned) were $719,000 and $756,000 at December
31, 1998 and 1997, respectively. Management believes the loans are adequately
secured and that no significant losses will be incurred.
Management has in place a comprehensive loan approval process and an asset
quality monitoring system. Management continues its efforts to collect accounts
previously charged off and to originate loans of high quality. Management
believes the allowance for loan losses at December 31, 1998 is adequate to
absorb credit losses on specifically identified loans as well as estimated
probable credit losses inherent in the remainder of the portfolio. Further
additions to the allowance for loan losses could become necessary, depending
upon the performance of the Banks' loan portfolio or changes in economic
conditions, as well as growth within the loan portfolio and results of
examinations by regulators.
NON-INTEREST INCOME. Non-interest income increased $1,099,000, or 28%, in 1998
to $4,968,000 as compared to $3,869,000 in 1997. Service charges on deposit
accounts increased $84,000, as overall deposit levels have increased. Gain on
sale of investment securities has decreased from 1997, resulting from
non-recurring gains the Company had on restructuring the investment portfolio in
the third quarter of 1997. Sold real estate loan fees have increased $1,319,000,
or 98%, in 1998 as compared to 1997, resulting from expansion of the Company's
mortgage operations and increased refinancing activity with the overall lower
interest rate environment. Other income has decreased $149,000, or 16% from
1997, resulting primarily from a non-recurring gain on sale of a rental building
in 1997 of $180,000.
Merger related costs, comprised of professional fees incurred in connection with
the 1997 acquisition of Pacific State Bank, were $10,000 and $253,000 for 1998
and 1997, respectively.
ESOP COMPENSATION EXPENSE. The Company sponsors an Employee Stock Ownership Plan
(ESOP), an employee-retirement benefit plan which own approximately 22% of the
common stock of the Company. Shares are released through dividends on allocated
shares, and through compensation expense (a non-cash charge to the income
statement). Compensation expense is calculated by multiplying the shares
released as compensation by the average share price of the Company's common
stock for the year. Two components of shareholders' equity are also affected.
There is a reduction in unearned ESOP shares at cost, and an increase in surplus
at the difference between the fair market value and the cost of the shares,
thereby creating no impact on shareholders' equity and off-setting the
compensation expense recorded on the income statement. As shares are released,
they are considered outstanding for the purposes of calculating earnings per
share and book value per share.
Based upon the increase in share price over the previous three years, the
Company has considered several remedies to contain the expense recorded as the
share price of the Company increased. Options included pursuing a Private Letter
Ruling with the Internal Revenue Service in an effort to extend the related debt
service, which would have reduced the number of shares released each year and
thereby reducing the expense recognized. In December 1998, the Company approved
a second option, which was to de-leverage the ESOP. The Company shortened the
ESOP tax year, permitting the repayment of the internal ESOP debt in one fiscal
year, split over two plan years. All unallocated shares were released for
allocation. As a result, the Company recognized $3,499,000 in ESOP compensation
expense for 1998, thereby eliminating this expense burden from future years.
OTHER NON-INTEREST EXPENSE. Other non-interest expense (excluding ESOP
compensation expense and merger related expense as discussed previously)
increased 29% to $13,471,000 in 1998 as compared to $10,409,000 in 1997.
Salaries and employee benefits, the largest non-interest expense, increased
$1,288,000, or 21%. Approximately $495,000 of this increase is related to
increased mortgage operations, which resulted in increased sold real estate loan
fee income of $1,319,000. The remaining increase results from the continuing
expansion activities of the Company. Equipment costs and professional fees
increased $505,000, also resulting from the increased operations and expansion
activities of the Company.
<PAGE>
Also included in other expense is the write-off of organizational costs. In
prior years, the Company capitalized and amortized these costs over a five year
period. In accordance with the newly issued AICPA Statement of Position (SOP)
98-5, the Company expensed $414,000 in 1998 of start-up costs related to
expansion which would have been capitalized before SOP 98-5. The Company also
wrote off the unamortized balance of start up costs of $80,000, net of tax, as
of the beginning of the year.
In 1998, the Company established an accrual for Year 2000 related costs of
$160,000. This accrual is estimated to cover the net book value of equipment to
be replaced early in 1999 and consulting costs associated with the on-going Year
2000 efforts. The Company has a detailed discussion of Year 2000 issues
beginning on page 27 of this report.
PROVISION FOR INCOME TAXES. The provision for income taxes has decreased
significantly from 1997, resulting from the overall net loss in 1998. The tax
benefit associated with ESOP compensation expense is calculated on the debt
retired, not the expense recognized. As such, the effective tax rate increased.
Also included in this amount is the tax expense of Lincoln Security Bank and the
tax benefit of McKenzie State Bank, each of which is not included in the
consolidated tax return, as the Company owns less than 80% of them.
LOAN LOSSES AND RECOVERIES
The provision for loan losses charged to operating expense is based on the
Company's loan loss experience and such factors which, in management's judgment,
deserve recognition in estimating possible loan losses. Management monitors the
loan portfolio to ensure that the allowance for loan losses is adequate to cover
outstanding loans on non-accrual status and any current loans deemed to be in
serious doubt of repayment according to each loan's repayment plan. The
following table summarizes the Company's allowance for loan losses, and
charge-off and recovery activity:
Year Ended December 31,
-----------------------
1999 1998 1997
--------------------------
(Dollars in thousands)
Loans and leases outstanding at end of period..... $190,680 $151,152 $141,632
======== ======== ========
Average loans and leases outstanding during the
period............................................ $168,231 $141,950 $133,157
======== ======== ========
Allowance balance, beginning of period............ $ 2,294 $ 1,429 $ 1,336
Recoveries:
Commercial...................................... 12 10 43
Real estate..................................... - - 1
Installment..................................... 55 15 62
Credit card..................................... 10 13 22
--- --- --
Total recoveries.............................. 77 38 128
Loans Charged off:
Commercial...................................... (4) (13) (69)
Real estate..................................... (3) - (3)
Installment..................................... (147) (199) (120)
Credit card..................................... (42) (68) (106)
---- ---- -----
Total charged off............................. (196) (280) (298)
Net loans charged off............................. (119) (242) (170)
Provision charged to operations................... 470 1,107 263
--- ----- ---
Allowance balance, end of period.................. $ 2,645 $ 2,294 & 1,429
======== ======== =======
Ratio of net loans charged off to average loans
and leases outstanding............................ 0.07% 0.17% 0.12%
===== ===== =====
<PAGE>
LENDING AND CREDIT MANAGEMENT
Although a risk of nonpayment exits with respect to all loans, certain specific
types of risks are associated with different types of loans. Due to the nature
of the Company's customer base and the growth experienced in Coos, Curry,
Lincoln, Douglas, Linn, Benton and Lane Counties, real estate is frequently a
material component of collateral for the Company's loans. The expected source of
repayment of these loans is generally the operations of the borrower's business
or personal income, but real estate provides an additional measure of security.
Risks associated with real estate loans include fluctuating land values, local
economic conditions, changes in tax policies, and a concentration of loans
within a limited geographic market area.
The Company mitigates risk on construction loans by generally lending funds to
customers that have been pre-qualified for long term financing and who are using
contractors acceptable to the Company. The commercial real estate risk is
further mitigated by making the majority of commercial real estate loans on
owner-occupied properties.
The Company manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. For example, the Company limits commercial loans to 70% of
the value of the collateral, and residential mortgages, which may be first or
second liens, to 80% of the value of the collateral. Residential loans with a
loan to value greater than 80% carry private mortgage insurance.
The following table presents information with respect to non-performing assets:
December 31,
------------
1999 1998
---- ----
(Dollars in thousands)
Loans on non-accrual status............ $ 468 $ 558
Loans past due greater than 90 days,
not on non-accrual 771 161
Other real estate owned, net........... 86 --
--- --
Total non-performing assets............ $1,325 $ 719
====== ======
Percentage of non-performing assets to
total assets .42% .26%
Interest income which would have been realized on non-accrual or past-due loans
if they had remained current was insignificant.
ALLOCATION OF RESERVE FOR LOAN LOSSES
The Company does not normally allocate the reserve for loan losses to specific
loan categories, with the exception of credit cards. An allocation by credit
quality is made below for presentation purposes. This allocation process does
not necessarily measure anticipated future credit losses; rather, it seeks to
measure the Company's assessment at a point in time of perceived credit loss
exposure and the impact of current economic conditions.
December 31,
------------
Percentage of Percentage of
1999 Total Loans 1998 Total Loans
---- ----------- ---- -----------
(Dollars in thousands)
Unclassified loans.. $1,764 0.94% $ 1,544 1.01%
Letters of credit... 1 0.00% - 0.00%
Credit cards........ 53 0.03% 53 0.03%
Watchlist........... 330 0.17% 205 0.14%
Substandard......... 481 0.25% 297 0.19%
Doubtful............ 16 0.00% 158 0.10%
Year 200 related reserve -- 0.00% 37 0.03 %
-- ----- -- ------
Total............ $2,645 1.39% $ 2,294 1.50%
====== ===== ======= =====
An assessment was made of the Bank's loan customers' ability to address the Year
2000 issues. Based upon this assessment, a special Year 2000 related reserve of
0 and $37,000 was established in 1999 and 1998, respectively.
<PAGE>
ANALYSIS OF NET INTEREST INCOME
The following table presents average balances of interest-earning assets and
interest-bearing liabilities, along with yields earned/paid, net interest spread
and net interest margin for the period indicated (amounts in thousands, except
percentages):
Analysis for the years ended December 31, 1999 1998 1997
- ----------------------------------------- ---- ---- ----
(Dollars in thousands)
Average interest-earning assets........ $265,685 $248,550 $242,696
Average interest-bearing liabilities... $258,217 $238,770 $231,176
Average yields earned.................. 7.87% 8.04% 8.28%
Average rates paid..................... 3.13% 3.53% 3.61%
----- ----- -----
Net interest spread.................... 4.74% 4.51% 4.67%
Net interest margin.................... 4.82% 4.65% 4.84%
Average yields earned and paid have decreased in 1999 compared to 1998 and 1997,
resulting from the overall decline in market rates and from increased
competitive pressures. However, the net interest margin increased in 1999
resulting from the increase in the loan to deposit ratio and the prepayment of
FHLB advances in 1998.
ANALYSIS OF CHANGE IN INTEREST DIFFERENTIAL
The following tables set forth the dollar amount of the change in the Company's
consolidated interest income and interest expense and attributes such dollar
amounts to changes in volume and rates. Rate/volume variances which were
immaterial have been allocated equally between rate and volume changes.
Year Ended December 31, 1999 over 1998
--------------------------------------
Total Amount of Change
Increase Attributed to
-------------
(Dollars in thousands) (Decrease) Volume Rate
---------- ------ ----
Interest income:
Loans, net and mortgage loans
held for sale $ 1,845 $ 2,442 $ (597)
Investment securities-taxable (121) 195 (316)
Investment securities-exempt from
federal income taxes (1) (99) (53) (46)
Dividend income on Federal Home Loan
Bank stock - - -
Dividend income on Federal Reserve
Bank stock 30 30 -
Time deposits-domestic financial
institutions - - -
Federal funds sold (702) (600) (102)
Net investment in direct financing leases (43) (24) (19)
--- --- ---
Total interest income (1) $ 910 $ 1,990 $(1,080)
------- ------ -------
Interest expense:
Interest on deposits:
NOW accounts $ 41 $ 28 $ 13
Money market accounts 413 367 46
Savings accounts 26 40 14)
Time deposits 98 391 (293)
Securities sold under agreement to repurchase 85 113 (28)
Short term borrowings (4) (6) 2
Other borrowings 49 49 -
Federal Home Loan Bank borrowings (1,054) (735) (319)
------- ----- -----
Total interest expense $ (346) $ 247 $ (593)
------- ------- -------
Net interest income (1) $ 1,256 $ 1,743 $ (487)
======== ======== =======
(1) Interest income from investment securities exempt from federal income tax
is not reported on a tax equivalent basis.
<PAGE>
Year Ended December 31, 1998 over 1997
--------------------------------------
Total Amount of Change
Increase Attributed to
-------------
(Dollars in thousands) (Decrease) Volume Rate
---------- ------ ----
Interest income:
Loans, net and mortgage loans held
for sale $ 496 $ 923 (427)
Investment securities-taxable (1,017) (723) (294)
Investment securities-exempt from
federal income taxes (1) (141) (112) (29)
Dividend income on Federal Home Loan
Bank stock (51) (56) 5
Dividend income on Federal Reserve
Bank stock 15 15 -
Time deposits-domestic financial
institutions (5) - (5)
Federal funds sold 615 617 (2)
Net investment in direct financing leases (8) (13) 5
-- --- -
Total interest income (1) $ (96) $ 651 $ (747)
-------- -------- -------
Interest expense:
Interest on deposits:
NOW accounts $ 13 $ 7 $ 127
Money market accounts 64 153 (89)
Savings accounts (10) (8) (2)
Time deposits 193 246 (53)
Securities sold under agreement to repurchase 60 57 3
Short term borrowings - (9) 9
Federal Home Loan Bank borrowings (343) (823) 480
----- ----- ---
Total interest expense $ 98 $ (377)$ 475
--------- -------- --------
Net interest income (1) $ (194) $ 1,028 $(1,222)
======== ========= =======
(1) Interest income from investment securities exempt from federal income
tax is not reported on a tax equivalent basis.
SUMMARY BALANCE SHEETS
December 31,
------------
1999 1998 $ Change % Change
---- ---- -------- --------
(Dollars in thousands)
Loans and leases, net..................$ 188,035 $148,857 $39,178 26.3%
Investments............................ 90,841 90,231 610 0.7%
Other assets........................... 37,725 34,551 3,174 9.2%
------ ------ ----- ----
Total asset.........................$ 316,601 $273,639 $42,962 15.7%
========== ======== ======= ==========
Deposits...............................$ 263,969 $226,795 $37,174 16.4%
Borrowings............................. 18,718 10,420 8,298 79.6%
Other labilities....................... 1,890 5,168 (3,278) (63.4)%
----- ----- ------- -------
Total liabilities................... 284,577 242,383 42,194 17.4%
Minority interest...................... 3,306 2,224 1,082 48.7%
Shareholders' equity................... 28,718 29,032 (314) (1.1)%
------ ------ ----- ------
Total liabilities, minority interest
and equity 316,601 $273,639 $42,962 15.7%
======= ======== ======= ====
Equity to asset ratio.................. 9.07% 10.61%
Loan to deposit ratio.................. 72.24% 66.65%
<PAGE>
As shown in the table above, net loans (including mortgage loans held for sale
and leases) increased $39.2 million, or 26.3%, and total deposits increased
$37.2 million, or 16.4%, resulting from the Company's growth initiatives. Five
of the Company's six subsidiary banks increased loans and deposits
significantly, while the sixth, Pacific State Bank in Reedsport, Oregon held
constant with prior year amounts.
The increase in deposits and borrowed funds was utilized to fund all loan
growth, as well as capital expenditures associated with new bank premises. As
such, investments remained relatively constant from December 31, 1998,
increasing only $610,000.
The Holding Company borrowed $800,000 in April 1999 to complete the
capitalization of the new Oregon State Bank. In addition, Security Bank utilized
the Federal Home Loan Bank with a 30 day advance for $4 million surrounding
December 31, 1999, associated with Year 2000 issues. The advance was repaid in
January 2000, thus reducing investment securities (primarily federal funds
sold).
LIQUIDITY
Liquidity enables the Company to meet the withdrawals of its depositors and the
borrowing needs of its loan customers. The Company's primary sources of funds
are customer deposits, maturities of investment securities, sales of "Available
for Sale" securities, loan sales, loan repayments, net income, advances from the
Federal Home Loan Bank of Seattle, and the use of the Federal Funds markets. The
Company maintains three unsecured lines of credit totaling $13.0 million for the
purchase of funds on an overnight basis. As discussed previously, the Company is
also a member of the Federal Home Loan Bank of Seattle, which provides a secured
line of credit in the amount of $38.4 million, and other funding opportunities
for liquidity and asset/liability matching. Over the last four years, these
lines have been used periodically. As of December 31, 1999, $1.9 million was
borrowed under the Company's unsecured lines of credit and $4.0 million in
borrowings from the Federal Home Loan Bank was outstanding. Interest rates
charged on the lines are determined by market factors. The Company's liquidity
has been stable and adequate over the past several years. Short-term deposits
have continued to grow and excess investible cash is invested on a short-term
basis into Federal Funds Sold. The Company's primary source of funds are
consumer deposits and commercial accounts. These funds are not subject to
significant movements as a result of changing interest rates and other economic
factors, and therefore enhance the Company's long term liquidity. In addition,
the Holding Company has a $2.5 million secured line of credit, of which $800,000
was outstanding at December 31, 1999.
CAPITAL RESOURCES
Beginning in 1990, federal regulators required the calculation of Risk-based
Capital. This is an analysis that weights balance sheet and off-balance sheet
items for their inherent risk. It requires minimum standards for Risk-based
Capital by Capital Tier. Full implementation of this analysis was required in
1992, requiring a minimum total Risk-based Capital ratio of 8.00% and a minimum
Tier I Capital Ratio of 4.00%.
At December 31, 1999, the Company had a Risk-based Capital Ratio of 16.0% and
Tier I Capital Ratio of 10.4%. This was compared to 17.2% and 10.7% for total
Risk-Based Capital and Tier I Capital, respectively, at December 31, 1998. The
Company currently exceeds the regulatory capital minimum requirements. If the
Company were fully leveraged (i.e. if the Company were at the minimum Risk-Based
Capital and Tier I Capital ratios), further growth would be restricted to the
level attainable through generation and retention of net income unless the
Company were to seek additional capital from outside sources.
YEAR 2000 ISSUES
The Company experienced no failure of mission-critical systems and no
significant issues with customers or external vendors associated with the Year
2000 roll-over date change. In the fourth quarter of 1999, the Company changed
its ATM/Debit card service provider network resulting from perceived risks the
existing vendor may have with its Year 2000 readiness. The Company experienced
no difficulties with this change, as the new vendor was successful with its Year
2000 readiness.
In 1999, the Company incurred approximately $25,000 in direct, specifically
identifiable expense associated with Year 2000 issues. However, the total cost
including allocation of personnel time cannot be readily determined. In
addition, the Company purchased new computer equipment in 1999 associated with
normal, recurring technology upgrades. These purchases cannot be specifically
identified as relating to Year 2000 issues.
The Company does not anticipate any significant issues or additional costs in
fiscal 2000 associated with the year 2000 roll-over date change.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
OVERVIEW. Interest rate, credit, and operations risks are the most significant
risks impacting the Company's performance. Other types of market risk, such as
foreign currency exchange rate risk and commodity price risk do not arise in the
normal course of the Company's business activities. The Company relies on loan
reviews, prudent loan underwriting standards and an adequate reserve for loan
loss to mitigate credit risk.
The Company defines interest sensitivity (or interest rate risk) as the risk
that the Company's earnings or capital will change when interest rates change.
Market, or economic risk, by comparison, is the risk that the value of the
Company's assets will change when interest rates change. To ensure consistent
measurement, the Company has developed comprehensive Asset and Liability
Management policies that are followed by all subsidiary banks.
"Exposure" is the change in pre-tax earnings, over a 12 month period, when the
Fed Funds rate changes. "Leverage" is the Company's exposure calculated as a
percent of capital and therefore is expressed in terms of a pre-tax Return on
Equity.
If the Company's earnings move in the same direction as interest rates, then the
Company is "asset sensitive" (i.e. interest income changes more than interest
expense). If the earnings move in the opposite direction from the change in
rates, then the Company is "liability sensitive" (i.e. interest expense changes
more than interest income).
CALCULATION OF INTEREST RATE RISK. A change in earnings as a result of changes
in interest rates is caused by two factors. First, the rate on each asset and
liability changes by a different amount and at a different time. Second, there
are different volumes of assets and liabilities maturing and repricing (the
traditional gap). The combination causes a change in the Company's net interest
margin.
EXPOSURE CALCULATION OF INTEREST RATE RISK. The Company will use change in
earnings exposure as its primary measure of interest rate risk. It is the policy
of the Company to control the exposure of the Company's earnings to changing
interest rates by generally maintaining a position within a reasonable range
around an "earnings neutral" or "balanced" position. This is defined as the mix
of assets and liabilities that generate a net interest margin that is not
affected by interest rate changes.
There are three reasons for establishing a target range rather than an exact
earnings neutral position. Measuring interest rate risk is not an exact science.
We can only estimate the earnings impact of a change in rates, and this estimate
may change as the rate environment changes (this is often called "basis risk").
Also, the mix of assets and liabilities available in the Company's market may
not produce an exact earnings neutral position, thus forcing the Company to
forego good business opportunities if it must keep a totally balanced position.
Lastly, a neutral position does not allow the Company to modestly position
itself to take advantage of a rising or falling rate trend (i.e. keeping
investments shorter when rates are rising).
There can be exceptions to this general rule. If, for example, the Company has a
liquidity or capital problem then this takes priority and the Company would
employ a strategy that protects liquidity by maintaining an asset sensitive
position (i.e. having assets that will reprice quickly to reflect a change in
interest rates). This would keep assets at current rates to allow their sale, if
needed, without recognizing a significant loss.
INTEREST RATE RISK EXPOSURE/LEVERAGE LIMITS. The Company shall normally maintain
a mix of assets and liabilities that produces interest rate risk that will
change the Company's net interest income over the next 12 months less than the
following limits, if the Fed Funds rate changes 2%:
Asset sensitive..........4.0%
Liability sensitive......2.0%
There is a lower risk limit for liability sensitivity because, in a liability
sensitive Company, interest rate risk and market risk move in the same
direction, thereby exaggerating the impact of changing rates. If the Company
were asset sensitive, these two risks would tend to offset each other.
<PAGE>
Interest rate risk is calculated quarterly and reported to the Asset/Liability
Management Committee and then to the respective Boards of Directors. Significant
changes in the structure of the Company's finances can be modeled during the
quarters to ensure continued compliance with these policy limits. At no time
during the year were these limitations exceeded.
INFLATION
The primary impact of inflation on the Company's operations is increased asset
yields, deposit costs and operating overhead. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Although interest rates do not necessarily move in
the same direction or to the same extent as the prices of goods and services,
increases in inflation generally have resulted in increased interest rates. The
effects of inflation can magnify the growth of assets, and if significant, would
require that equity capital increase at a faster rate than would otherwise be
necessary.
INVESTMENT PORTFOLIO
See footnote four of the audited financial statements for the amortized costs,
estimated market values, unrealized gains and unrealized losses of the Company's
investment portfolio as of December 31, 1999 and 1998.
LOAN PORTFOLIO
Interest earned on the loan portfolio is the primary source of income for the
Company. Net loans and leases represented 59.4% of total assets as of December
31, 1999. Although the Company strives to serve the credit needs of its service
area, its primary focus is on real estate, commercial and consumer installment
loans. The Company makes substantially all of its loans to customers located
within the Company's service area. The Company has no loans defined as highly
leveraged transactions by the Federal Reserve Bank, nor significant agricultural
loans. Commercial real estate loans primarily include owner-occupied commercial
properties occupied by the proprietor of the business conducted on the premises,
and income-producing or farm properties. The primary risks of such loans include
loss of income of the owner or occupier of the property and the inability of the
market to sustain rent levels. The Company's underwriting standards attempt to
mitigate these risks by requiring a minimum of three consecutive years of
sufficient income generation from the owner or occupier or rental incomes of 1.2
times the combined debt service, insurance and taxes. In addition, a 70%
loan-to-value ratio limitation is expected to provide sufficient protection
against unforeseen circumstances. Other commercial loans include renewable
operating lines of credit, short-term notes, and equipment financing. These
types of loans are principally at risk due to insufficient business income.
Accordingly, the Company does not lend to start-up businesses or others lacking
operating history, and requires personal guarantees and secondary sources of
repayment. Residential real estate loans include 1-4 family owner or non-owner
occupied residences, multi-family units, construction and secondary market loans
pending sale. Generally, the risk associated with such loans is the loss of the
borrower's income. The Company attempts to mitigate the risk by thorough review
of the borrower's credit and employment history, and limits the loan-to-value
ratio to 80% to provide protection in the event of foreclosure. Installment
loans consist of personal, automobile or home equity loans. See footnote five of
the audited financial statements for the composition of the Company's loan
portfolio.
<PAGE>
The following is a summary of the contractual maturities and weighted average
yields of investment securities classified as available for sale at December 31,
1999:
Amortized Estimated Weighted
Cost Market Value Average Yield(1)
---- ------------- ---------------
(Dollars in thousands)
U.S. Government federal agencies
One year or less.................... 9,440 $ 9,419 5.32%
After one year through five years... 20,573 20,110 5.64%
After five years through ten years.. 1,495 1,494 5.82%
----- ----- -----
Total............................. $31,508 $31,023 5.55%
-------- ------- -----
Mortgage-backed securities
One year or less.................... $ 2,796 $ 2,586 6.24%
After one year through five years... 17,246 17,247 6.60%
After five years through ten years.. 4,394 4,345 7.05%
After ten years..................... 2,838 2,795 6.78%
----- ----- -----
Total............................. $27,274 $26,973 6.65%
------- ------- -----
United States Treasury
One year or less.................... $ 2,998 $ 2,966 4.79%
After one year through five years... 1,010 1,001 5.68%
----- ----- -----
Total............................. $ 4,008 $ 3,967 5.01%
-------- -------- -----
Corporate obligations
One year or less.................... $ 1,266 $ 1,250 5.38%
After one year through five years... 9,479 9,161 5.64%
After five years through ten years`. 1,113 1,047 6.01%
After ten years..................... 714 673 6.24%
--- --- -----
Total............................. $12,572 $12,131 5.68%
------- ------- -----
Obligations of state and political
subdivisions(1)
One year or less.................... $ 525 $ 627 2.61%
After one year through five years... 1,406 1,422 5.91%
After five years through ten years.. 3,906 3,782 5.05%
After ten years..................... 8,376 7,979 4.93%
----- ----- -----
Total............................. $14,213 $13,810 4.95%
------- ------- -----
Total securities available for sale (1) $89,575 $87,904 5.79%
======= ======= ====
(1) Yields on tax-exempt securities have not been stated on a tax-equivalent
basis.
As of December 31, 1999, the Company had no securities classified as "held to
maturity." Actual maturities may differ for mortgage backed securities due to
ability to prepay.
<PAGE>
DEPOSIT LIABILITIES
The following table sets forth the average deposit liabilities of, and rates
paid by, the Company for the periods indicated:
Years Ended December 31,
------------------------
(Dollars in thousands) 1999 1998
---- ----
Deposit Liabilities Amount Rate Amount Rate
- ------------------- ------ ---- ------ ----
Demand..............................$ 45,126 n/a $ 37,211 n/a
NOW accounts........................ 35,363 1.50% 33,440 1.47%
Money market accounts............... 46,87 3.69% 36,957 3.56%
Savings accounts.................... 22,256 2.41% 20,581 2.48%
Time deposits....................... 97,161 4.91% 89,208 5.24%
------ ---- ------ ----
Total deposits....................$246,785 3.07% $217,397 3.22%
======== ==== ======== ====
See footnote ten for the Company's time deposit maturities as of December 31,
1999.
Time deposits of $100 or more represented 10.60% and 9.35% of total deposits as
of December 31, 1999 and 1998, respectively. All other time deposits represent
31.1% and 29.6% of total deposits as of December 31, 1999 and 1998,
respectively.
BORROWINGS
The following table sets forth information regarding the Company's Federal Home
Loan Bank (FHLB) borrowings for the years ended December 31, 1999 and 1998:
(Dollars in thousands) 1999 1998
---- ----
FHLB Borrowings:
Amount outstanding at year end............. $ 4,000 --
Average outstanding for the year........... $ 208 $ 13,423
Maximum outstanding at any month end....... $ 4,000 $ 14,000
Weighted average rate for the year......... 5.57% 7.94%
Weighted average rate at year end.......... 5.80% --%
Weighted average maturity at year end (days) 12 --
<PAGE>
AVERAGE BALANCE SHEET AND AVERAGE RATES EARNED AND PAID
The following table presents, for the periods indicated, information regarding
average balances of assets and liabilities of the Company, the total dollar
amounts of interest income from interest-earning assets and interest expense on
interest-bearing liabilities, the average interest yields earned or rates paid,
net interest income, net interest spread (the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities), and the ratio of net interest income to average
earning assets or margin. The table does not reflect any effect of income taxes.
All average balances are based on daily balances.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Average Average Yield Average Average Yield Average Average Yield
Balance Interest or Rates Balance Interest or Rates Balance Interest or Rates
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold $10,431 $511 4.90% $22,573 $ 1,213 5.37% $ 11,068 $598 5.40%
Time deposits-domestic
financial institutions - - -% - - -% 69 5 7.25%
Investment securities-taxable 69,503 3,931 5.66% 66,098 4,052 6.13% 77,902 5,069 6.51%
Investment securities-exempt
from federal income tax 14,692 737 5.02% 15,758 836 5.30% 17,877 977 5.47%
Loans, gross and mortgage loans
held for sale, at cost which
approximates market(1)(2) 165,519 15,289 9.24% 138,968 13,444 9.67% 130,042 12,948 9.96%
Net investment in direct
financing leases 2,712 241 8.89% 2,982 284 9.53% 3,11 292 9.37%
Federal Home Loan Bank stock,
at cost 2,082 151 7.25% 1,915 151 7.87% 2,622 202 7.70%
Federal Reserve Bank Stock,
at cost 746 45 6.03% 256 15 5.86% - - -%
--- -- ---- --- -- ---- - - --
Total interest-earning assets/
interest income $265,685 $20,905 7.87% $248,550 $19,995 8.04% $242,696 $20,091 8.28%
Cash and due from banks 10,494 8,264 7,264
Premises and equipment, net 9,655 5,747 5,058
Loan loss reserve.... (2,465) (1,433) (1,380)
Investment market value adjustment (425) 800 233
Purchased mortgage servicing rights 2,471 1,634 894
Other assets 8,006 8,474 5,917
----- ----- -----
Total assets $293,421 $272,036 $260,682
======== ======== ========
Liabilities, Minority Interest
and Shareholders' Equity
Demand accounts $45,126$ - -% $37,211 $ - -% $29,592 $ - -%
NOW accounts 35,363 532 1.50% 33,440 491 1.47% 33,001 357 1.08%
Money market accounts 46,879 1,730 3.69% 36,957 1,317 3.56% 32,635 1,253 3.84%
Savings accounts 22,256 536 2.41% 20,581 510 2.48% 20,868 520 2.49%
Time deposits 97,161 4,775 4.91% 89,208 4,677 5.24% 84,511 4,484 5.31%
Securities sold under
agreement to repurchase 10,394 436 4.19% 7,666 351 4.58% 6,374 291 4.57%
Short-term borrowings 225 19 8.44% 284 23 8.10% 400 23 5.75%
Other borrowings 605 49 8.10% - - -% - - -%
Federal Home Loan Bank
borrowings 208 12 5.77% 13,423 1,066 7.94% 23,795 1,409 5.92%
--- -- ---- ------ ----- ---- ------ ----- ----
Total interest-
bearing liabilities/
interest expense $258,217 $8,089 3.13% $238,770 $ 8,435 3.53% $231,176 $8,337 3.61%
Other liabilities 3,389 3,419 1,997
----- ----- -----
Total liabilities 261,606 242,189 233,173
Minority Interest 3,031 1,111 924
Shareholders' equity 28,784 28,736 26,585
------ ------ ------
Total liabilities, minority
interest and shareholders'
equity $293,421 $272,036 $260,682
======== ======== ========
Net interest income $12,816 $11,560 $11,754
Net interest spread 4.74% 4.51% 4.67%
Net interest income to earning
assets (margin) 4.82% 4.65% 4.84%
</TABLE>
(1) Average non-accrual loans included in the computation of average loans were
$596, $681 and $511 for 1999, 1998 and 1997, respectively. (2) Loan related fees
recognized during the period and included in the yield calculation totaled
approximately $421, $147 and $259 in 1999, 1998 and 1997, respectively.
<PAGE>
ITEM 8....FINANCIAL STATEMENTS
The financial statements required by regulation S-X are set forth in the pages
listed below.
Page
Independent Auditors' Report 34
Consolidated Balance Sheets, as of December 31, 1999 and 1998 35
Consolidated Statements of Income, for the years ended
December 31, 1999,1998 and 1997 36
Consolidated Statements of Comprehensive Income, for the years 37
ended December 31, 1999,1998 and 1997
Consolidated Statements of Shareholders Equity, for the years
ended December 31, 1999, 1998 and 1997 38
Consolidated Statements of Cash Flows, for the years ended
December 31, 1999, 1998 and 1997 39
Notes to Consolidated Financial Statements 40-63
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Security Bank Holding Company:
We have audited the accompanying consolidated balance sheets of Security Bank
Holding Company (the Company) and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security Bank
Holding Company and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Portland, Oregon
January 28, 2000
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
Dollars in Thousands, Except Per Share Data
ASSETS 1999 1998
---- ----
Cash and cash equivalents:
Cash and due from banks ........................... $13,632 $10,686
Federal funds sold................................. 3,060 7,667
----- -----
Total cash and cash equivalents................. 16,692 18,353
Investment securities available for sale ............. 87,904 87,575
Loans, net............................................ 181,385 140,124
Mortgage loans held for sale, at cost which
approximates market................................... 3,925 5,920
Net investment in direct financing leases ............ 2,725 2,813
Premises and equipment, net .......................... 13,785 10,518
Mortgage servicing rights............................. 2,717 2,086
Federal Home Loan Bank stock, at cost ................ 2,181 2,007
Federal Reserve Bank stock, at cost................... 756 649
Other assets.......................................... 4,531 3,594
----- -----
Total assets.................................... $316,601 $273,639
======== ========
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand.......................................... $ 43,610 $ 40,539
NOW accounts.................................... 36,996 35,777
Money market accounts........................... 50,841 40,883
Savings accounts................................ 22,450 21,341
Time deposits .................................. 110,072 88,255
------- ------
Total deposits.............................. 263,969 226,795
Securities sold under agreements to repurchase..... 13,501 10,388
Short term borrowings.............................. 417 32
Federal Home Loan Bank borrowings ................. 4,000 --
Other borrowings................................... 800 --
Other liabilities.................................. 1,890 5,168
----- -----
Total liabilities............................... 284,577 242,383
Minority interest in subsidiary....................... 3,306 2,224
Shareholders' equity:
Nonvoting preferred stock, $5 par value.
Authorized 5,000,000 shares; none issued........ - --
Voting preferred stock, $5 par value.
Authorized 5,000,000 shares; none issued........ - --
Common stock, $5 par value.
Authorized 10,000,000 shares - issued and outstanding
4,914,872 shares in 1999 (4,906,848 shares in 1998) 24,575 24,535
Surplus ........................................... 4,778 4,745
Retained earnings ................................. 413 (707)
Accumulated other comprehensive (loss) income...... (1,048) 459
------- ---
Total shareholders' equity...................... 28,718 29,032
Commitments and contingent liabilities
Total liabilities, minority interest and
shareholders' equity $316,601 $273,639
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Dollars in Thousands, Except Per Share Data
1999 1998 1997
---- ---- ----
Interest income:
Interest on loans......................... $15,289 $13,444 $12,948
Interest and dividends on securities:
Taxable................................ 3,931 4,052 5,069
Exempt from Federal income tax......... 737 836 977
Interest on time deposits-domestic financial
institutions.............................. -- -- 5
Dividend income on Federal Home Loan Bank stock 151 151 202
Dividend income on Federal Reserve Bank stock 45 15 --
Interest on Federal funds sold............ 511 1,213 598
Income on direct financing leases......... 241 284 292
--- --- ---
Total interest income.................. 20,905 19,995 20,091
------ ------ ------
Interest expense:
Deposits
NOW.................................... 532 491 357
Money market........................... 1,730 1,317 1,253
Savings................................ 536 510 520
Time................................... 4,775 4,677 4,484
Securities sold under agreements to repurchase 436 351 291
Short term borrowings..................... 19 23 23
Other borrowings.......................... 49 -- --
Federal Home Loan Bank borrowings......... 12 1,066 1,409
-- ----- -----
Total interest expense................. 8,089 8,435 8,337
----- ----- -----
Net interest income.................... 12,816 11,560 11,754
Provision for loan losses ................... 470 1,107 263
--- ----- ---
Net interest income after provision for
loan losses............................ 12,346 10,453 11,491
Other income:
Service charges on deposit accounts....... 1,303 1,213 1,129
Gain on sale/call of investments available
for sale, net............................. 186 22 191
Loan servicing fees....................... 332 263 249
Sold real estate loan fees................ 2,124 2,670 1,351
Other..................................... 1,256 800 949
----- --- ---
Total other income..................... 5,201 4,968 3,869
----- ----- -----
Other expense:
Salaries and employee benefits............ 8,345 7,353 6,065
Occupancy of bank premises................ 1,009 823 711
Furniture and equipment................... 1,389 1,107 898
Professional fees......................... 628 1,143 847
FDIC assessment........................... 27 26 23
Supplies.................................. 587 409 349
ESOP compensation......................... -- 3,499 716
Other..................................... 2,739 2,620 1,769
----- ----- -----
Total other expense.................... 14,724 16,980 11,378
------ ------ ------
Income (loss) before provision for income
taxes and minority interest............... 2,823 (1,559) 3,982
Provision for income taxes ............ 869 25 1,247
--- -- -----
Income (loss) before minority interest.... 1,954 (1,584) 2,735
Net loss attributable to minority interest 60 35 30
-- -- --
Net income (loss)................ $2,014 $(1,549) $2,765
====== ======= ======
Net income (loss) per share - basic $.41 $(.31) $.62
==== ===== ====
Net income (loss) per share - diluted $.41 $(.31) $.61
==== ===== ====
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Dollars in Thousands
1999 1998 1997
---- ---- ----
Net income (loss)............................ $2,014 $(1,549) $2,765
Other comprehensive income, net of income tax:
Unrealized (loss) gain on investment securities
(Net of tax of $753, $6, and $134 for the years
ended December 31, 1999, 1998 and 1997,
respectively.)............................ (1,635) (13) 133
Less: reclassification adjustment for gains
included in net income (Net of tax of $58, $7
and $59 for the years ended December 31, 1999,
1998 and 1997, respectively.)............. 128 15 132
---- -- ---
Unrealized (loss) gain on investment
securities............................. (1,507) 2 265
Comprehensive income (loss).................. $507 $(1,547) $3,030
==== ======= ======
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Dollars in Thousands, Except Per Share Data
<TABLE>
<CAPTION>
Accumulated
Unearned Other Total
Common Stock Retained ESOP shares Comprehensive Shareholders'
Shares Amount Surplus Earnings at Cost Income Equity
------ ------ ------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1996........ 4,879,325 $24,397 $1,934 $528 $(1,728) $192 $25,323
Net income.................... -- -- -- 2,765 -- -- 2,765
Dividends..................... -- -- -- (825) -- -- (825)
Sale of common stock.......... 5,319 27 (24) -- -- -- 3
Stock options exercised....... 12,172 61 1 -- -- -- 62
Release of ESOP shares........ -- -- 571 -- 259 -- 830
Unrealized gain on securities
available for sale, net.... -- -- -- -- -- 265 265
-- -- -- -- -- --- ---
Balance, Dec. 31, 1997........ 4,896,816 $24,485 $2,482 $2,468 $(1,469) $457 $28,423
Net loss...................... -- -- -- (1,549) -- -- (1,549)
Dividends..................... -- -- -- (1,626) -- -- (1,626)
Sale of common stock.......... 3,946 20 (3) -- -- -- 17
Stock options exercised....... 6,086 30 1 -- -- -- 31
Release of ESOP shares........ -- -- 2,265 -- 1,469 -- 3,734
Unrealized gain on securities
available for sale, net.... -- -- -- -- -- 2 2
-- -- -- -- -- - -
Balance, Dec. 31, 1998........ 4,906,848 $24,535 $4,745 $(707) $-- $459 $29,032
Net income.................... -- -- -- 2,014 -- -- 2,014
Dividends..................... -- -- -- (894) -- -- (894)
Sale of common stock.......... 8,024 40 33 -- -- -- 73
Stock options exercised....... -- -- -- -- -- -- --
Stock dividend................ -- -- -- -- -- -- --
Unrealized loss on securities
available for sale, net.... -- -- -- -- -- (1,507) (1,507)
-- -- -- -- -- ------ ------
Balance, Dec. 31, 1999........ 4,914,872 $24,575 $4,778 $413 $-- $(1,048) $28,718
========= ======= ====== ==== === ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
SECURITY BANK HOLDING COMPANY & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Dollars in Thousands, Except Per Share Data
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) ................................. $2,014 $(1,549) $2,765
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................ 1,537 471 412
Deferred tax expense (benefit)............... 301 (735) 211
Provision for loan losses.................... 470 1,107 263
ESOP related compensation expense............ -- 3,499 716
Origination of mortgage loans held for sale.. (107,698) (121,856) (57,138)
Proceeds from mortgage loans sold............ 109,693 118,144 57,114
Net (gain) loss on sale of fixed assets...... (66) 20 (164)
Net gain on call/sale of investment securities
available for sale........................... (186) (22) (191)
Increase in mortgage servicing rights........ (631) (1,192) (234)
Federal Home Loan Bank stock dividend........ (156) (146) (201)
Net loss attributable to minority interest... (60) (35) (30)
(Increase) decrease in other assets.......... (331) 1,006 (9)
(Decrease) increase in other liabilities..... (3,278) 1,365 836
------ ----- ---
Net cash provided by operating activities 1,609 77 4,350
----- -- -----
Cash flows from investing activities:
Net decrease in time deposits - domestic
financial institutions....................... -- -- 270
Purchase of investment securities available
for sale..................................... (44,860) (50,725) (45,548)
Proceeds from sale of investment securities
available for sale........................... 20,231 8,786 24,003
Proceeds from maturities and call of investment
securities available for sale................ 21,563 40,306 30,864
Net loan originations........................ (32,070) (1,434) (17,306)
Purchase of participations.................. (9,661) (4,656) (1,039)
Additions to premises and equipment......... (4,295) (3,710) (1,865)
Purchase of Federal Home Loan Bank stock..... (18) (21) (3,192)
Redemption of Federal Home Loan Bank stock... -- -- 3,897
Purchase of Federal Reserve Bank stock....... (115) (649) --
Redemption of Federal Reserve Bank stock..... 8 -- --
Proceeds from sales of premises and equipment 66 -- 215
Originations of direct financing leases...... (1,122) (718) (1,076)
Gross payments on direct financing leases.... 1,210 961 1,022
Minority interest in subsidiaries............ 1,142 1,351 --
----- -----
Net cash used in investing activities.... (47,921) (10,509) (9,755)
------- ------- ------
Cash flows from financing activities:
Net increase in deposits..................... 37,174 12,954 19,877
Increase in securities sold with agreements
to repurchase................................ 3,113 2,443 3,383
Increase (decrease) in Federal Home Loan
Bank borrowings.............................. 4,000 (16,000) (1,028)
Increase in other borrowings................. 800 -- --
Proceeds from issuance of common stock....... 73 2,313 636
Payment of dividends......................... (894) (1,626) (825)
Increase (decrease) in short term borrowings. 385 (551) 5
--- ---- -
Net cash provided by (used in) financing
activities............................... 44,651 (467) 22,048
------ ---- ------
Net (decrease) increase in cash and cash
equivalents.............................. (1,661) (10,899) 16,643
Cash and cash equivalents at beginning of period 18,353 29,252 12,609
------ ------ ------
Cash and cash equivalents at end of period...... $16,692 $18,353 $29,252
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year
for:
Interest................................. $8,019 $8,543 $8,290
Income taxes............................. $713 $957 $1,427
Supplemental disclosures of investing activities:
Unrealized (loss) gain on investment securities
available for sale, net of tax............... $(1,507) $2 $265
Supplemental disclosures of financing activities:
Stock dividend............................... $1,934 $-- $--
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Security Bank Holding Company (the Company), a bank holding company, its
wholly-owned subsidiaries, Security Bank (Security Bank), Pacific State Bank
(Pacific State) and Family Security Bank (Family Security), its majority-owned
subsidiaries, Lincoln Security Bank (Lincoln Security), McKenzie State Bank
(McKenzie State), and Oregon State Bank (Oregon State) and Security Bank's
wholly-owned subsidiary Alland Inc. Security Bank, Pacific State, Family
Security, Lincoln Security, McKenzie State and Oregon State are referred to
collectively herein as the Banks. All intercompany accounts and transactions
have been eliminated in consolidation.
(b) DESCRIPTION OF BUSINESS
Security Bank conducts a general banking business. Its activities include the
usual functions of a commercial bank: commercial, real estate and installment
loans; equipment leasing; checking and savings accounts; collection and escrow
services and safe deposit facilities. Security Bank's primary market area
consists of cities and communities along the Southern Oregon Coast in Coos
County.
Alland Inc. holds title to certain assets of Security Bank.
Pacific State conducts a general banking business, offering commercial banking
services to small and medium size businesses, professionals and retail customers
in the Reedsport, Lakeside and Gardiner communities of Oregon. As discussed more
fully in note 3, Pacific State was acquired by the Company in November 1997, and
now operates as a wholly-owned subsidiary. The acquisition was accounted for as
a pooling of interests. Accordingly, all prior period financial data have been
restated to include the financial results of Pacific State.
Family Security conducts a general banking business. Its activities include the
usual functions of a commercial bank: commercial, real estate and installment
loans; checking and savings accounts; collection and escrow services and safe
deposit facilities. Family Security's primary market area consists of Curry
County.
Lincoln Security is a state chartered bank located in Newport, Oregon, in which
the Company holds a majority interest. The Company facilitated the organization
of Lincoln Security by purchasing 68.44% of all outstanding common shares of
Lincoln Security common stock, with the remainder of the outstanding common
stock held by local investors. Lincoln Security commenced operations in May
1996, and engages in general commercial banking business. Lincoln Security
offers commercial banking services to small and medium size businesses,
professionals and retail customers in their market area. The Company's ownership
of Lincoln Security was 68.33% as of December 31, 1999, 1998 and 1997.
McKenzie State is a newly organized state chartered bank located in Springfield,
Oregon in which the company holds a majority interest. The Company facilitated
the organization of McKenzie State by purchasing 65.89% of the outstanding
common shares of McKenzie State's common stock, with the remainder of the
outstanding common stock held by local investors.
McKenzie State commenced operations in November of 1998, and engages in general
commercial banking business. McKenzie State offers commercial banking services
to small and medium size businesses, professionals and retail customers in their
market area. The Company's ownership of McKenzie State was 68.14% as of December
31, 1999, and 65.89% as of December 31, 1998.
Oregon State is a newly organized state chartered bank located in Corvallis,
Oregon, in which the Company holds a majority interest. The Company facilitated
the organization of Oregon State by purchasing 69.19% of all outstanding common
shares of Oregon State's common stock, with the remainder of the outstanding
common stock held by local investors. Oregon State commenced operations in April
1999, and engages in general commercial banking business. Oregon State offers
commercial banking services to small and medium businesses, professionals and
retail customers in their market area. The Company's ownership of Oregon State
was 69.19% as of December 31, 1999.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The Banks are subject to the regulations of certain federal agencies and undergo
periodic examinations by these regulatory authorities.
(c) BASIS OF FINANCIAL STATEMENT PREPARATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and judgements that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of real estate
owned, management obtains independent appraisals for significant properties.
The Banks are located in Coos, Curry, Douglas, Lincoln, Lane and Benton Counties
of Oregon. A large portion of the Banks' assets are loans, which are
collateralized by real estate in this geographic area and other assets of the
borrower and, accordingly, the ultimate collectibility of this portion of the
Banks' loan portfolios are susceptible to changes in the local market
conditions. However, the loan portfolio is diversified and management believes
there is no concentration of loans exceeding 10% for any particular industry. It
is management's opinion that the allowance for losses on loans and real estate
owned is adequate to absorb credit losses on specifically identified loans as
well as estimated probable losses in the remainder of the portfolio. The
allowance for loan losses was $2,645,000 and $2,294,000 at December 31, 1999 and
1998.
While management uses available information to recognize losses on loans and
real estate owned, future additions to the allowance may be necessary based on
changes in economic conditions.
(d) INVESTMENT SECURITIES
Investment securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Securities available for
sale and trading account securities are stated at market value. Gains and losses
on sales of securities, recognized on a specific identification basis, and
valuation adjustments of trading account securities are included in noninterest
income. Net unrealized gain or loss on securities available for sale are
included, net of tax, as a component of other comprehensive income.
(e) INCOME RECOGNITION
Interest is accrued on a simple interest basis. The accrual of interest on loans
is discontinued and the loan is considered impaired when, in management's
judgement, the future collectibility of interest or principal is in doubt. Loans
are generally placed on non accrual status when they are 90 days past due.
Interest previously accrued and unpaid is subsequently recognized only to the
extent cash payments are received. When delinquent interest is paid in full and,
in management's judgement, the borrower's ability to make periodic interest and
principal payments is back to normal, the loan is returned to accrual status.
Loan origination and commitment fees, net of certain direct loan origination
costs, are generally recognized over the life of the related loan as an
adjustment of the yield.
(f) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's recognition of the assumed
risks of extending credit and its evaluation of the quality of the loan
portfolio. The allowance is maintained at a level considered adequate to provide
for potential loan losses based on management's assessment of various factors
affecting the loan portfolio, including a review of problem loans, business
conditions, loss experience and an overall evaluation of the quality of the
portfolio. The allowance is increased by provisions charged to operations and
reduced by loans charged off, net of recoveries. Regulatory examiners may
require the Banks to recognize additions to the allowance based upon their
judgements about information available to them at the time of their
examinations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
(g) DIRECT FINANCING LEASES
The aggregate lease payments to be received over the term of the leases plus the
estimated residual values are capitalized as Security Bank's net investment in
the leases. The excess of the investment in the leases over the costs of the
equipment (unearned income) is recognized as income over the term of the lease
using the effective interest method.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense over the
estimated useful lives of the assets (building-thirty-one and one half to forty
years; furniture and equipment-five to seven years). Depreciation is computed
principally on the straight-line method for assets acquired prior to 1991 and
subsequent to January 1, 1997, and on accelerated methods for assets acquired
from 1991 through 1996.
(i) OTHER REAL ESTATE
Other real estate, acquired through foreclosure or deed in lieu of foreclosure,
is carried at the lower of cost or estimated fair value, not to exceed estimated
net realizable value. When the property is acquired, any excess of the loan
balance over the estimated net realizable value is charged to the allowance for
loan losses. Subsequent write-downs, if any, are charged to the allowance for
other real estate losses.
(j) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(k) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such, compensation expense
would be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
The fair market value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model.
(l) CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS
The Company adopted Statement of Financial Accounting Standards No. 125 (SFAS
No. 125) "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," on January 1, 1997. SFAS No. 125 requires that
corporations that acquire mortgage servicing rights through either the purchase
or origination of mortgage loans and sells or securitizes those loans with
servicing rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and loans (without the mortgage servicing
rights) based on their relative fair values. The statement also requires that
corporations assess their capitalized mortgage servicing rights for impairment
based on the fair value of those rights. Adoption of this SFAS had no material
impact on the Company's financial position or results of operations.
(m) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are sold for one-day periods.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
(n) STOCK DIVIDEND
On January 25, 2000, the Company declared a 5% stock dividend on the Company's
common stock which will be paid on February 25, 2000 to stockholders of records
on February 11, 2000. In addition to the 5% stock dividend, the Company will
increase the number of stock options and purchase rights under the 1995 Stock
Option Plan by 5% and reduce the exercise prices accordingly. All references to
weighted average shares outstanding, per share amounts, stock purchase rights,
option shares, and exercise prices included in the accompanying consolidated
financial statements and notes reflect the 5% stock dividend and its retroactive
effect.
(o) RECLASSIFICATIONS
Certain amounts previously reported on the December 31, 1998 and 1997,
Consolidated Financial Statements have been reclassified to conform to
classifications in the December 31, 1999, Consolidated Financial Statements.
(p) RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the AICPA issued Statement of Position SOP 98-5, Reporting on the
Cost of Start-up Activities. SOP 98-5 establishes accounting and reporting
standards requiring that all organizational costs must be expensed as incurred.
This SOP is effective for fiscal years beginning after December 15, 1998, but
earlier adoption is available. The Company has historically capitalized and
amortized these costs over five years. In 1998, the Company adopted SOP 98-5,
the cumulative effect of which was not material to the Company's statement of
income.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Due to the issuance of SFAS 137
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of SFAS No. 133, this SFAS is effective for fiscal years
beginning after June 15, 2000 and as such, will be adopted by the Company in
2001. The Company does not expect implementation to have a material impact on
the Consolidated Financial Statements.
2. CASH AND DUE FROM BANKS
The Banks are required to maintain an average reserve balance with the Federal
Reserve Bank, or maintain such reserve balance in the form of cash. The amount
of this required reserve balance on December 31, 1999 and 1998 was approximately
$1,541 and $1,433, respectively, and was met by holding cash and maintaining an
average reserve balance with the Federal Reserve Bank.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
3. 1997 ACQUISITION OF PACIFIC STATE BANK
In June 1997, Security Bank Holding Company (SBHC) and Pacific State Bank (PSB)
announced a definitive agreement to merge in a stock-for-stock exchange. The
transaction, accounted for as a pooling of interests, was consummated on
November 22, 1997, in an exchange of 3.10 shares of Security Bank Holding
Company common stock for each share of Pacific State Bank common stock. There
were 1,261,313 shares of Security Bank Holding Company common stock issued for
406,875 shares of Pacific State Bank common stock.
Combined Condensed Consolidated Statements of Income, which are based upon the
unaudited financial statements of SBHC and PSB for the Nine months ended
September 30, 1997 were as follows (per share amounts have been restated for the
5% stock dividend issued August 1999 and the 5% stock dividend declared January
2000):
Nine months ended
September 30, 1997
(unaudited)
SBHC PSB COMBINED
----------------------
Interest income...................... 11,783 3,093 14,876
Interest expense.................... 5,097 1,090 6,187
----- ----- -----
Net interest income before provision 6,686 2,003 8,689
Provision for loan loss.............. 190 21 211
--- -- ----
Net interest income............... 6,496 1,982 8,478
Other income......................... 2,597 340 2,937
Merger related expense............... 124 72 196
All other expense.................... 7,076 1,000 8,076
----- ----- -----
Net income before minority interest
and provision for tax........... 1,893 1,250 3,143
Provision for income tax............. 580 423 1,003
--- --- -----
Net income before minority interest 1,313 827 2,140
Loss attributable to minority interest 16 -- 16
-- -- --
Net income........................ 1,329 827 2,156
===== === =====
Net income per share - basic...... $0.45 $1.85 $0.49
===== ===== =====
The Combined Consolidated Statements of Income are not necessarily indicative of
the results that would have occurred had the acquisition been consummated in the
past. There were no transactions between Security Bank Holding Company and
Pacific State Bank prior to the combination.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
4. INVESTMENT SECURITIES
The amortized costs, estimated market values, unrealized gains and unrealized
losses of investment securities at December 31, 1999 and 1998 are summarized as
follows:
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
1999:
Available for sale
- ------------------
U.S. Government and Federal
Agencies........................$31,508 $4 $489 $31,023
Mortgage-backed securities...... 27,274 29 330 26,973
United States Treasury.......... 4,008 1 42 3,967
Corporate obligations........... 12,572 - 441 12,131
Obligations of state and
political subdivisions.......... 14,213 61 464 13,810
------ -- --- ------
Total available for sale.....$89,575 $95 $1,766 $87,904
======= === ====== =======
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
1998:
Available for sale
- ------------------
U.S. Government and Federal
Agencies........................$17,879 $88 $41 $17,926
Mortgage-backed securities...... 14,784 180 20 14,944
United States Treasury.......... 15,067 81 25 15,123
Corporate obligations........... 20,073 27 146 19,954
Obligations of state and
political subdivisions.......... 19,015 648 35 19,628
------ --- -- ------
Total available for sale.....$86,818 $1,024 $267 $87,575
======= ====== ==== =======
Gross realized gains and gross realized losses on sales of securities available
for sale for the years ended December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Federal
Agencies.................... $ 9 $ - $ 13 $ 2 $114 $12
United State Treasury....... 17 - 4 _ 19 _
Corporate obligations....... 16 54 2 _ _ _
Obligations of state and
political subdivisions...... 228 30 6 1 83 13
--- -- - - -- --
Total.................... $270 $ 84 $ 25 $ 3 $216 $25
==== ==== ==== ==== ==== ===
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
Approximate investment portfolio maturities at December 31, 1999 are as follows:
Securities Available For Sale
-----------------------------
Estimated
Amortized Market
Cost Value
---- -----
One year or less...................$17,025 $16,848
After one year through five years.. 49,714 48,941
After five years through ten years 10,908 10,668
After ten years.................... 11,928 11,447
------ ------
Total...........................$89,575 $87,904
======= =======
The following table represents the carrying value of securities pledged to
secure public deposits as required or permitted by law and securities sold under
agreements to repurchase at December 31, 1999 and 1998:
1999 1998
---- ----
U.S. Government and Federal Agencies $26,147 $16,030
United States Treasury............. -- 10,613
Obligations of state and political
subdivisions....................... 7,824 9,494
------ ------
Total........................... $33,971 $36,137
======= =======
The Federal Reserve Bank (FRB) requires the bank to maintain a level of
investment of FRB stock. The required amount was $756 at December 31, 1999.
5. LOANS AND MORTGAGE LOANS HELD FOR SALE
Major categories of loans at December 31, 1999 and 1998 included in the
portfolio are as follows:
1999 1998
---- ----
Commercial-real estate....................... $ 60,120 $ 37,511
Commercial-lines of credit................... 45,729 39,565
Residential-real estate...................... 48,881 35,748
Installment.................................. 30,213 31,848
Credit cards and other....................... 3,356 3,888
----- -----
Total loans............................... 188,299 148,560
Deferred loan fees, net...................... (344) (222)
Allowance for loan losses.................... (2,645) (2,294)
------- -------
Net loans................................. $185,310 $146,044
======== ========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
Approximate loan portfolio maturities on fixed rate loans and repricing on
variable rate loans at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Within One To After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Commercial-real estate........................ $15,665 $25,590 $18,865 $60,120
Commercial-lines of credit.................... 28,952 13,974 2,803 45,729
Residential-real estate....................... 15,818 5,661 27,402 48,881
Installment................................... 3,067 16,649 10,497 30,213
Credit cards and other........................ 2,477 879 -- 3,356
----- --- -- -----
Total loans................................ $65,979 $62,753 $59,567 $188,299
======= ======= ======= ========
</TABLE>
Mortgage loans held for sale are included above as residential real estate loans
maturing within one year.
Loans on nonaccrual status were approximately $468 and $558 at December 31, 1999
and 1998, respectively. Interest income which would have been realized on
non-accrual loans if they had remained current was insignificant.
Renegotiated loans were approximately $172 and $309 at December 31, 1999 and
1998, respectively. These loans were renegotiated to accommodate the borrower.
The Company has no commitments to extend additional credit on loans which are
renegotiated, non-accrual or impaired at December 31, 1999.
At December 31, 1999 and 1998, Security Bank serviced approximately $280,241 and
$223,305, respectively, of loans owned by others.
The Bank's lending activities are concentrated on the Central and Southwestern
coasts of Oregon and in Western Oregon.
6. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 were as follows:
1999 1998 1997
---- ---- ----
Balance, beginning of year..................... $ 2,294 $ 1,429 $1,336
Provision for loan losses...................... 470 1,107 263
Loans charged off.............................. (196) (280) (298)
Recoveries of loans previously charged off..... 77 38 128
-- -- ---
Balance, end of year....................... $ 2,645 $ 2,294 $ 1,429
======= ======= =======
The recorded investment in loans for which an impairment has been recognized at
December 31, 1999, 1998 and 1997 was $768, $580 and $296, respectively. The
related allowance for loan losses on impaired loans at December 31, 1999, 1998
and 1997 was $128, $190 and $109, respectively. The average recorded investment
in impaired loans during 1999, 1998 and 1997 was $760, $515 and $330,
respectively. Interest income recognized on impaired loans receivable during
1999, 1998 and 1997 was insignificant.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
7. DIRECT FINANCING LEASES
Following are the components of the net investment in direct financing leases at
December 31, 1999 and 1998:
1999 1998
---- ----
Total minimum lease payments receivable....... $ 2,450 $ 2,830
Add:
Estimated unguaranteed residual values
of leased equipment..................... 812 534
Less:
Unearned income........................... 537 551
--- ---
Net investment in direct financing leases $ 2,725 $ 2,813
======= =======
Future minimum lease payments to be received on direct financing leases are as
follows:
Year ending December 31:
2000...................... $ 1,243
2001...................... 552
2002..................... 366
2003...................... 202
2004..................... 87
--
Total................... $ 2,450
=======
8. PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31, 1999 and 1998 are as
follows:
1999 1998
---- ----
Land................................ $ 2,175 $ 1,715
Buildings........................... 9,995 8,307
Furniture and equipment............. 7,871 5,724
----- -----
20,041 15,746
Less accumulated depreciation and
amortization........................ (6,256) (5,228)
------ ------
$13,785 $10,518
======= =======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Weighted Carrying Market
Average Value of Value of
Repurchase Interest Underlying Underlying
Amount Rate Assets Assets
------ ---- ------ ------
December 31, 1999: Overnight........ $13,501 4.10% $13,501 $13,501
December 31, 1998: Overnight........ $10,388 4.18% $10,388 $10,388
The securities underlying agreements to repurchase entered into by the Banks are
for the same securities originally sold, with a one-day maturity. In all cases,
the Company maintains control over the securities. Securities sold under
agreements to repurchase averaged approximately $11,252 for the year ended
December 31, 1999 and the maximum amount outstanding at any month end for the
year ended December 31, 1999 was $13,501. Investment securities are pledged as
collateral in an amount equal to the repurchase agreements.
10. TIME DEPOSITS
Time certificates of deposit in excess of $100 aggregated to $27,974, $21,214
and $24,145 at December 31, 1999, 1998 and 1997, respectively. Interest expense
on these certificates amounted to approximately $1,177, $1,448 and $1,382 for
the years ended December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999, remaining time to maturity of time deposits were as
follows:
Time deposits All other
of $100 or more time deposits
--------------- -------------
3 months or less............ $10,101 36.11% $26,001 31.67%
4 to 6 months............... 6,936 24.80% 17,739 21.61%
7 to 12 months.............. 8,334 29.79% 25,198 30.69%
Over 1 year................. 2,603 9.30% 13,160 16.03%
----- ---- ------ -----
Total.................. $27,974 100.00% $82,098 100.00%
======= ======= ======= =======
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS PLAN - The Company has a qualified profit sharing (401k) plan
covering all half-time or greater personnel with at least twelve months of
service. Actual contributions by the Company to the plan are determined by the
Board of Directors and are not to exceed the amount deductible for federal
income tax purposes. The Company made no contributions to the 401k plan in
either 1999, 1998 or 1997.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) - The Company sponsors an employee stock
ownership plan (ESOP) that covers all employees who meet the eligibility
requirements. To be eligible, an employee must be age twenty-one or older and
have completed one year of service during which the employee has at least 1,000
hours of service. The ESOP is noncontributory. Employees are 20% vested after
two years of service and vesting increases at the rate of 20% each year
thereafter such that employees are 100% vested after six years of services. The
Company makes annual contributions to the ESOP at a minimum, sufficient to pay
interest due on outstanding loans, required principal repayments, operating
expenses and administrative fees. In certain years, the Company has also
deposited additional funds to enable the ESOP to repurchase shares from
participants. All dividends received by the ESOP are used to pay debt service.
The ESOP shares initially were pledged as collateral for its debt. As the debt
is repaid, shares are released from the collateral based on the proportion of
debt service paid in the year and allocated to active employees.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The shares pledged as collateral for debt due to the Company by the ESOP are
reported as unearned ESOP shares on the consolidated balance sheets. As shares
are committed to be released from collateral, the Company reports compensation
expense equal to the shares being released for allocation multiplied by the
average market price of the Company's common stock during the year. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings.
Dividends on unallocated ESOP shares are recorded as a reduction of debt and
accrued interest.
In 1998, the ESOP debt was repaid in full, thereby releasing all remaining
shares for allocation. The ESOP shares as of December 31, 1999, 1998 and 1997
were as follows (per share amounts have been restated for the 5% stock dividend
issued August 1999 and the 5% stock dividend declared January 2000):
1999 1998 1997
----- ---- ----
Allocated................... 796,202 639,140 576,500
Shares released for allocation 193,520 424,222 75,455
Unreleased shares........... -- -- 424,222
-- -- -------
Total ESOP shares....... 989,722 1,063,362 1,076,177
======= ========= =========
Fair value of unreleased shares $ -- $ -- $ 4,714
======== ========= ========
EXECUTIVE SUPPLEMENTAL INCOME PLAN - The Company sponsors a Key Executive
Deferred Compensation Plan which is a noncontributory defined benefit plan
covering a select group of key management employees. Benefits under the Plan are
based on years of service, final average pay and covered compensation. At
December 31, 1999, the Plan covered eight participants, including four
employees, two former employees with vested rights to future benefits, and two
retirees and beneficiaries receiving benefits.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The Key Executive Deferred Compensation Plan is an unfunded plan providing
supplementary retirement benefits to high-level employees. The activity with
respect to this plan in 1999, 1998 and 1997 is as follows:
Pension Benefits
----------------
1999 1998 1997
---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $1,016 $ 808 $ 608
Service cost........................... 43 39 36
Interest cost.......................... 65 60 45
Amendments............................. -- 66 --
Actuarial (gain) loss.................. (189) 159 134
Benefits paid.......................... (15) (116) (15)
--- ---- ---
Benefit obligation at end of year... $ 920 $1,016 $ 808
======= ====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1. -- -- --
Employer contribution.................. 15 116 15
Plan participants' contributions....... -- -- --
Benefits paid.......................... (15) (116) (15)
--- ---- ---
Fair value of plan assets at end of year -- -- --
== == ==
RECONCILIATION AT DECEMBER 31,
Funded status.......................... (920) (1,016) (808)
Unrecognized net actuarial loss........ 25 239 341
Unrecognized prior service cost........ 38 45 52
-- -- --
Net amount recognized............... (857) (732) (415)
===== ===== =====
TOTAL RECOGNIZED AMOUNTS IN THE BALANCE SHEET
CONSIST OF:
Accrued benefit cost................... (857) (732) (415)
Total recognized.................... (857) (732) (415)
===== ===== =====
NET PERIODIC BENEFIT COST.............. $ 140 $ 123 $ 99
======== ========== ========
Pension Benefits
----------------
WEIGHTED-AVERAGE ASSUMPTIONS 1999 1998 1997
---- ---- ----
AS OF DECEMBER 31,
Discount rate....................... 6.50% 6.50% 7.50%
Expected return on plan assets...... N/A N/A N/A
Rate of compensation increase....... 3.50% 3.50% 4.50%
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost........................... 43 39 35
Interest cost.......................... 65 60 46
Amortization of prior service cost..... 7 7 7
Recognized net actuarial loss.......... 25 17 11
-- -- --
Net periodic benefit cost.......... $ 140 $ 123 $ 99
===== ===== ======
STOCK OPTION PLAN-The Company maintains an Employee Stock Option Plan (the
"Employee Plan"), adopted in 1995, under which 304,290 shares of common stock
are reserved for issuance to key employees. The Employee Plan provides for the
grant of options to purchase shares to selected employees. The purchase price of
shares for which stock options are granted shall not be less than 100% of the
fair market value of such shares on the date of the grant. Options granted under
the Employee Plan are exercisable in installments and expire on such date as the
Compensation Committee of the Board of Directors may determine, but not later
than 10 years from the date of grant. The following table summarizes stock
option activity for the years ended December 31, 1999, 1998 and 1997 (per share
amounts have been restated for the 5% stock dividend issued August 1999 and the
5% stock dividend declared January 2000):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year.................139,466 $6.57 99,842 $5.49 106,502 $5.14
Grants............................ 87,098 $8.00 57,881 $7.94 5,513 $12.02
Exercised......................... - - (6.085) ($5.14) (12,173) ($5.14)
Cancelled and returned to plan...(16,538) ($7.93) (12,172) ($5.14) - -
------- ------ ------- ------ - -
End of year.......................210,026 $7.08 139,466 $6.57 99,842 $5.49
Options excercisable at the
end of year....................... 72,434 $5.14- 52,259 $5.14- 30,429 $5.14
$12.02 $12.02
Weighted average fair value per share
of options granted during year.... $3.85 $3.46 $5.68
</TABLE>
The fair value per share of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants in 1997, 1998 and 1999: Dividend yield of 2.6%,
3.3% and 2.4%, risk-free interest rates of 5.8%, 4.5% and 6.0%, volatility of
60%, and expected lives of five years.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under the Black-Scholes option-pricing model described above, as
permitted in SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Net income (loss), as reported...$ 2,014 $ (1,549) $ 2,765
Net income (loss), pro forma.....$ 1,933 $ (1,590) $ 2,730
Basic EPS, as reported...........$ .41 $ (.31) $ .62
Basic EPS, pro forma.............$ .39 $ (.32) $ .61
Diluted EPS, as reported.........$ .41 $ (.31) $ .61
Diluted EPS, pro forma...........$ .39 $ (.32) $ .60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
Outstanding options at December 31,1999 are as follows:
Exercise
Vested Price
Total Shares Shares Per Share Expiration
------------ ------ --------- ----------
76,071 60,857 $ 5.14 2005
11,025 1,103 $ 7.37 2009
41,344 8,269 $ 7.93 2008
76,073 -- $ 8.10 2009
5,513 2,205 $12.02 2007
The pro forma expense related to stock options was $81, $41 and $35 for 1999,
1998 and 1997, respectively.
12. EARNINGS PER SHARE
Basic and diluted net income per share are based on the weighted average number
of common shares outstanding during each year with diluted including the effect
of potentially dilutive common shares. For the year ended December 31, 1997, the
weighted average number of common shares outstanding did not include 384,784
held by the Company's ESOP as these shares had not been allocated to participant
accounts, nor had they been committed to be released. The following table
presents information relating to the weighted average number of common shares
outstanding for all periods presented for both basic and diluted net income per
share calculations. All amounts have been restated for the 5% stock dividend
issued August 1999 and the 5% stock dividend declared January 2000.
1999 1998 1997
---- ---- ----
Weighted average shares - basic........4,914,684 4,905,065 4,486,525
Potential dilution of stock options....* 24,482 ** 35,805 ** 47,384
--------- --------- ---------
Weighted average shares - diluted......4,939,166 4,940,870 4,533,909
========= ========= =========
* Options to purchase 122,929 shares of common stock were outstanding during
1999 but were not included in the computation of diluted EPS as they were
anti-dilutive.
** Options to purchase 5,513 shares of common stock were outstanding during 1998
and 1997 but were not included in the computation of diluted EPS as they were
anti-dilutive.
13. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum requirements can
initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier I Capital to average assets (as
defined). Management believes, as of December 31, 1999, that the Company meets
all capital adequacy requirements to which it is subject.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
As of December 31, 1999, the most recent notification from the Federal Reserve
Board categorized the Company as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Company
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the Company's
category.
The Company's capital amounts and ratios are presented in the following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets)$35,489 16.01% $17,729 >8% $22,161 >10%
- -
Tier 1 Capital
(to Risk Weighted Assets)$32,872 14.83% $ 8,864 >4% $13,297 >6%
- -
Tier 1 Capital
(to Average Assets) $32,872 10.44% $12,591 >4% $15,738 >5%
- -
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)$32,676 17.15% $15,246 >8% $19,057 >10%
- -
Tier 1 Capital
(to Risk Weighted Assets)$30,382 15.94% $ 7,623 >4% $11,434 >6%
- -
Tier 1 Capital
(to Average Assets) $30,382 10.72% $11,340 >4% $14,175 >5%
- -
</TABLE>
The Banks, as state-chartered banks with deposits insured by the Federal Deposit
Insurance Corporation ("FDIC") are members of the Federal Reserve System and are
subject to the supervision and regulation of the Director of the Oregon
Department of Consumer and Business Services, administrated through the Division
of Finance and Corporate Securities ("Oregon Director"), and to the supervision
and regulation of the Federal Reserve Bank (FRB). As of December 31, 1999, the
most recent notification from the FRB categorized the Banks as well capitalized
under the regulatory framework for prompt corrective action.
The Banks, as state-chartered banks, are prohibited from declaring or paying any
dividends in an amount greater than undivided profits. At December 31, 1999,
1998 and 1997, undivided profits of approximately $6,223, $4,244 and $7,576,
respectively, were available for the payment of dividends to the Company without
prior regulatory approval.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
14. COMMITMENTS AND CONTINGENCIES
The Banks are leasing five of their branches under operating leases which
include renewals at various dates. The approximate future minimum rental
payments under these leases are as follows:
Year ending December 31:
2000..........................$ 227
2001.......................... 197
2002......................... 149
2003......................... 135
2004.......................... 91
Thereafter.................... 1,023
-----
$ 1,822
=======
Rental expense for all operating leases was approximately $238, $175 and $132
for the years ended December 31,1999, 1998 and 1997, respectively.
At December 31, 1999, the Company has $47,200 available under unused lines of
credit with various renewal dates.
In the normal course of business, there are various commitments outstanding,
including commitments to extend credit and commercial letters of credit to
ensure performance of certain commercial customer obligations.
At December 31, 1999, 1998 and 1997, these commitments and obligations were as
follows:
1999 1998 1997
---- ---- ----
Loans at fixed rates...................$16,994 $ 5,235 $ 1,510
Loans at variable rates................ 25,403 33,577 14,183
------ ------ ------
$42,397 $38,812 $15,693
======= ======= =======
The Company is, from time to time, a defendant in legal proceedings arising in
the normal course of business. In the opinion of management the disposition of
pending litigation will not have a material effect on the Company's financial
position.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
15. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 1998 and
1997 consists of the following:
1999 1998 1997
---- ---- ----
Current................................$ 568 $ 760 $ 1,036
Deferred............................... 301 (735) 211
--- ---- ---
$ 869 $ 25 $ 1,247
====== ======= =======
The provision for income taxes results in effective tax rates which are
different from the federal income tax statutory rate. The nature of the
differences for the years ended December 31, 1999, 1998 and 1997, are as
follows:
1999 1998 1997
---- ---- ----
Computed expected federal tax at statutory
rate of 34%..........................$ 960 $ (530) $ 1,354
State taxes, net of federal effect..... 123 86 101
Tax exempt interest.................... (304) (304) (318)
Change in valuation allowance.......... -- -- (184)
ESOP adjustments....................... -- 793 155
Other, net............................. 90 (20) 139
-- --- ---
$ 869 $ 25 $ 1,247
====== ======= =======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The tax effects of temporary differences which give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are as follows:
1999 1998
---- ----
Deferred tax assets:
Investment securities due to reserve for
unrealized losses................. $ 619 $ --
Loans receivable,
due to allowance for possible loan
losses............................ 794 666
Other liabilities,
due to deferred compensation reserve 472 418
Deferred loan fees ................. 32 38
Net operating loss carry forward.... 119 42
Prepaid ESOP contribution........... -- 379
Other............................... 153 267
--- ---
Total gross deferred tax assets.. $2,189 $1,810
Less valuation allowance............... -- --
-- --
Net deferred tax assets.......... $2,189 $1,810
------ ------
Deferred tax liabilities:
Investment securities,
due to reserve for unrealized
gains.............................$ -- $ 288
FHLB stock.......................... 190 127
Investment securities,
due to accretion of discount...... 84 113
Leased assets....................... 239 319
Premises and equipment,
due to difference in depreciation. 748 670
Other............................... 69 40
-- --
Total gross deferred tax
liabilities...................... $1,330 $1,557
------ ------
Net deferred tax asset........... $ 859 $ 253
====== =======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The valuation allowance for deferred tax assets as of January 1, 1998 was zero.
The net change in the total valuation allowance for the years ended December 31,
1999 and 1998 was zero.
The Company has determined that no valuation allowance is necessary as it is
more likely than not that the gross deferred tax asset of $2,189 will be
principally realized through carryback to taxable income in prior years, future
reversals of existing taxable temporary differences, and, to a lesser extent,
future taxable income. Management believes that future taxable income will be
sufficient to realize the benefits of temporary differences that cannot be
realized through carryback to prior years or through the reversal of future
temporary taxable differences.
16. TRANSACTIONS WITH RELATED PARTIES
Some of the directors, executive officers and principal shareholders of the
Company, and the companies with which they are associated, are customers of and
have had banking transactions with the Banks in the ordinary course of business,
and the Banks expect to have such transactions in the future. All loans and
commitments to loan included in such transactions were made on substantially the
same terms (including interest rates and collateral) as those prevailing at the
time for comparable transactions with other persons, and in the opinion of the
management of the Banks, do not involve more than the normal risk of
collectibility or present any other unfavorable features.
An analysis of activity with respect to loans to directors, executive officers
and principal shareholders of the Company for the years ended December 31, 1999,
1998 and 1997 follows:
1999 1998 1997
---- ---- ----
Balance, beginning of year............$ 6,730 $ 3,837 $ 3,349
Additions.............................. 10,177 5,935 2,726
Repayments.............................(6,605) (3,042) (2,238)
------ ------ ------
Balance, end of year..................$ 10,302 $ 6,730 $ 3,837
======== ======== =======
At December 31, 1999, deposits from related parties were $4,342.
17. FEDERAL HOME LOAN BANK BORROWINGS
At December 31, 1999, Security Bank had outstanding advances from the Federal
Home Loan Bank (FHLB) of $4,000 with a weighted average rate of 5.8% and a
weighted average maturity of 30 days. These advances were collaterized by
certain investment securities, certain residential first mortgage loans,
deposits with the FHLB, and FHLB stock totaling approximately $4,000 at December
31, 1999. There were no advances outstanding as of December 31, 1998. The FHLB
requires the Banks to maintain a level of investment of FHLB stock. The required
amount was $742 and $810 at December 31, 1999 and 1998, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, the following information is presented.
Financial instruments have been construed to generally mean cash or a contract
that implies an obligation to deliver or receive cash or another financial
instrument to or from another entity. The estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents...........$ 16,692 $ 16,692 $ 18,353 $ 18,353
Investment securities............... 87,904 87,904 87,575 87,575
Loans and leases, net............... 184,110 182,058 142,937 144,085
Mortgage servicing rights........... 2,717 2,947 2,086 2,117
Mortgage loans held for sale........ 3,925 3,925 5,920 5,920
Federal Home Loan Bank stock........ 2,181 2,181 2,007 2,007
Federal Reserve Bank stock.......... 756 756 649 649
Financial liabilities:
Deposits............................ 263,969 264,193 226,795 226,436
Securities sold under agreements to
repurchase.......................... 13,501 13,501 10,388 10,388
Short term borrowings............... 417 417 32 32
Other borrowings.................... 800 800 -- --
Federal Home Loan Bank borrowings... 4,000 4,000 -- --
Off balance sheet financial instruments:
Loan commitments.................... 42,072 42,072 38,645 38,645
Letters of credit................... 325 325 167 167
</TABLE>
Financial assets and financial liabilities other than investment securities are
not traded in active markets. The above estimates of fair value require
subjective judgements and are approximate. Changes in the following
methodologies and assumptions could significantly affect the estimates. These
estimates may also vary significantly from the amounts that could be realized in
actual transactions.
o Financial Assets - The estimated fair value approximates the book value
of cash equivalents. For investment securities, the fair value is based on
quoted market prices. The fair value of loans is estimated by discounting
future cash flows using current rates at which similar loans would be
made. The fair value of mortgage servicing rights is estimated by
discounting future cash flows using current rates at which similar loans
would be made, and a constant prepayment rate of 5%. The fair value of
mortgage loans held for sale, Federal Home Loan Bank stock and Federal
Reserve Bank stock approximates their carrying amounts.
o Financial Liabilities - The estimated fair value of time deposits is
estimated by discounting the future cash flows using current rates at which
similar deposits would be made. The estimated fair value approximates the
carrying amounts of short term borrowings, securities sold under agreements
to repurchase and other borrowings. The estimated fair value of Federal Home
Loan Bank borrowings is estimated by discounting the future cash flows using
current rates at which similar borrowings would be made.
o Off-Balance Sheet Financial Instruments - Fair value considers the
difference between current levels of interest rates and committed rates. See
note 14 to the consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The Company did not hold any derivative financial instruments in its investment
portfolio at or during the year ended December 31, 1999, with the exception of
collateralized mortgage obligations.
19. SEGMENT INFORMATION
The Company has three reportable segments: commercial banking, mortgage banking,
and administration. The commercial banking segment's activities include the
usual functions of a commercial bank: commercial real estate and installment
loans; equipment leasing; checking and savings accounts; collection and escrow
services and safe deposit facilities. The mortgage banking segment's activities
include primarily the origination of residential mortgage loans and subsequent
sale in the secondary market. The administration segment's activities include
strategic planning, management of investment portfolio, accounting, human
resource administration, and data processing.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Management evaluates segment
performance based on segment profit or loss before income taxes and nonrecurring
gains and losses. Transfers between segments are accounted for at market value.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies.
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income.............................$20,988 $-- $12 $(95) $20,905
Interest expense..............................8,136 -- 48 (95) 8,089
------ -- --- -----
Net interest income before provision..12,852 -- (36) -- 12,816
Provision for loan losses.......................470 -- -- -- 470
--- -- -- -- ---
Net interest income...................12,382 -- (36) -- 12,346
Non-interest income...........................3,115 2,403 4,325 (4,642) 5,201
ESOP compensation expense..................... -- -- -- -- --
Other non-interest expense...................10,940 1,985 3,396 (1,597) 14,724
------ ----- ----- ------- ------
Income (loss) before taxes and
minority interest......................4,557 418 893 (3,045) 2,823
Income taxes..................................1,574 149 (854) -- 869
----- --- ----- -- ---
Income (loss) before minority interest....... 2,983 269 1,747 (3,045) 1,954
Loss attributable to minority interest......... -- -- -- 60 60
-- -- -- -- --
Net income (loss).....................$2,983 $269 $1,747 $(2,985) $2,014
====== ==== ====== ======== ======
Loans, net.................................$188,027 $-- $-- $-- $188,027
Investments, net.............................90,841 -- -- -- 90,841
Other assets.................................38,701 269 30,065 (31,302) 37,733
------ --- ------ -------- ------
Total assets........................$317,569 $269 $30,065 $(31,302) $316,601
======== ==== ======= ========= ========
Deposits...................................$264,800 $-- $-- $(831) $263,969
Borrowings...................................20,953 -- 800 (3,035) 18,718
Other liabilities.............................1,074 -- 816 -- 1,890
----- -- --- -- -----
Total liabilities...................$286,827 $-- $1,616 $(3,866) $284,577
======== === ====== ======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- -------------------------
<S> <C> <C> <C> <C> <C>
Interest income.............................$19,905 $-- $93 $(3) $19,995
Interest expense..............................8,438 -- -- (3) 8,435
----- -- -- --- -----
Net interest income before provision..11,467 -- 93 -- 11,560
Provision for loan losses.....................1,107 -- -- -- 1,107
----- -- -- -- -----
Net interest income...................10,360 -- 93 -- 10,453
Non-interest income...........................2,609 2,904 2,163 (2,708) 4,968
ESOP compensation expense.....................1,884 717 898 -- 3,499
Other non-interest expense....................8,556 1,888 4,176 (1,139) 13,481
----- ----- ----- ------- ------
Income (loss) before taxes and
minority interest......................2,529 299 (2,818) (1,569) (1,559)
Income taxes....................................995 111 (1,081) -- 25
--- --- ------- -- --
Income (loss) before minority interest....... 1,534 188 (1,737) (1,569) (1,584)
Loss attributable to minority interest......... -- -- -- 35 35
-- -- -- -- --
Net income (loss).....................$1,534 $188 $(1,737) $(1,534) $(1,549)
====== ==== ======= ======= =======
Loans, net.................................$150,942 $-- $-- $-- $150,942
Investments, net.............................90,231 -- -- -- 90,231
Other assets.................................35,445 237 30,151 (33,367) 32,466
------ --- ------ -------- ------
Total assets........................$276,618 $237 $30,151 $(33,367) $273,639
======== ==== ======= ========= ========
Deposits...................................$229,295 $-- $-- $(2,500) $226,795
Borrowings...................................16,495 -- -- (6,075) 10,420
Other liabilities.............................3,811 50 1,307 -- 5,168
----- -- ----- -- -----
Total liabilities...................$249,601 $50 $1,307 $(8,575) $242,383
======== === ====== ======== ========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollars in Thousands, Except Per Share Data
The following table presents summary income and balances for reportable segments
and reconciles segments to the Company's consolidated totals for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
Commercial Mortgage Intersegment
Banking Banking Administration Eliminations Consolidated
------- ------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income.............................$20,096 $-- $78 $(83) $20,091
Interest expense..............................8,420 -- -- (83) 8,337
----- -- -- ---- -----
Net interest income before provision..11,676 -- 78 -- 11,754
Provision for loan losses.......................263 -- -- -- 263
--- -- -- -- ---
Net interest income...................11,413 -- 78 -- 11,491
Non-interest income...........................2,335 1,584 10 (60) 3,869
ESOP compensation expense..................... 611 105 -- -- 716
Other non-interest expense....................8,637 1,394 691 (60) 10,662
----- ----- --- ---- ------
Income (loss) before taxes and
minority interest......................4,500 85 (603) -- 3,982
Income taxes..................................1,396 30 (179) -- 1,247
----- -- ----- -- -----
Income (loss) before minority interest....... 3,104 55 (424) -- 2,735
Loss attributable to minority interest......... -- -- -- 30 30
-- -- -- -- --
Net income (loss).....................$3,104 $55 $(424) $30 $2,765
====== === ====== === ======
Loans, net.................................$141,299 $-- $-- $-- $141,299
Investments, net.............................87,970 -- -- -- 87,970
Other assets.................................41,783 1,880 25,257 (27,957) 40,963
------ ----- ------ -------- ------
Total assets........................$271,052 $1,880 $25,257 $(27,957) $270,232
======== ====== ======= ========= ========
Deposits...................................$216,388 $125 $-- $(2,672) $213,841
Borrowings...................................24,528 -- -- -- 24,528
Other liabilities.............................2,091 417 24 -- 2,532
----- --- -- -- -----
Total liabilities...................$243,007 $542 $24 $(2,672) $240,901
======== ==== === ======== ========
</TABLE>
20. PARENT COMPANY ONLY FINANCIAL DATA
The following sets forth the condensed financial information of Security Bank
Holding Company on a stand-alone basis:
Statement of Condition
1999 1998
---- ----
ASSETS
Cash................................................... $554 $1,626
Fed funds sold......................................... -- 985
-- ---
Total cash and cash equivalents........................ 554 2,611
Investment in the subsidiaries......................... 27,454 24,832
Other assets........................................... 2,326 2,946
----- -----
Total Assets.............................................. $30,334 $30,389
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities...................................... $816 $1,357
Other borrowings....................................... 800 --
--- --
Total Liabilities......................................... 1,616 1,357
----- -----
Stockholders' equity...................................... 28,718 29,032
------ ------
Total liabilities and stockholders' equity................ $30,334 $30,389
======= =======
<PAGE>
Notes to Consolidated Financial Statements
Dollars in Thousands, Except Per Share Data
Statement of Income
1999 1998 1997
---- ---- ----
Income
Income from the subsidiaries...................$3,044 $1,569 $3,368
Other income....................................3,696 3,591 88
----- ----- --
Total Income...........................................6,740 5,160 3,456
Expenses
Other expense...................................5,430 7,679 691
----- ----- ---
Total Expense..........................................5,430 7,679 691
Income (loss) before income taxes......................1,310 (2,519) 2,765
Income tax benefit.....................................(704) (970) --
----- ----- --
Net income (loss).....................................$2,014 $(1,549) $2,765
====== ======== ======
Statement of Cash Flows
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).....................................$2,014 $(1,549) $2,765
Adjustments to reconcile net income to net cash...
provided by operating activities:
Provision for deferred income taxes................(704) (970) --
Equity in undistributed losses (earnings) of
subsidiaries.....................................(1,144) 4,132 (2,570)
Net change in other liabilities......................163 1,333 23
Net change in other assets...........................620 (2,655) --
Other, net............................................-- 5,371 31
-- ----- --
Net cash provided by operating activities................949 5,662 249
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for investments in and advances to
subsidiaries.........................................(2,985) (4,136) (147)
Sale or repayment of investments in and advances
to subsidiaries...........................................-- 684 --
Other, net................................................-- (902) --
-- ----- --
Net cash used in investing activities................(2,985) (4,354) (147)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long term debt.............................. -- -- --
Proceeds from issuance of common stock....................73 48 65
Increase in other borrowings............................ 800 -- --
Dividends paid.........................................(894) (1,626) (825)
Other, net............................................... -- 234 830
-- --- ---
Net cash (used in) provided by financing activities.....(21) (1,344) 70
Net (decrease) increase in cash and cash equivalents.(2,057) (36) 172
Cash and cash equivalents at beginning of year........ 2,611 2,647 2,475
----- ----- -----
Cash and cash equivalents at end of year................$554 $2,611 $2,647
==== ====== ======
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table shows as to each nominee for Director and for those
Directors whose terms have not yet expired, the identified information as of
February 11, 2000:
Year Elected
or
Appointed as Year Term
Name Age Position Director Expires
- ---- --- -------- -------- -------
Charles D. Brummel 60 Chairman/CEO 1974 2002
William A. Lansing 53 Vice Chairman/Director 1991 2001
Kenneth C. Messerle 59 Director 1992 2002
Ronald L.. LaFranchi 47 Director 1997 2000
Glenn A. Thomas 58 Director 1995 2001
Gary L. Waggonner 58 Director 1999 2000
Robert L. Fullhart 68 Director 1997 2000
EXPERIENCE OF DIRECTORS
The business experience of each of the directors and executive officers for at
least the past five years has been as follows:
CHARLES D. BRUMMEL currently serves as Chairman of the Board, and serves as
Director and Chief Executive Officer of the Company. He was a director of
the Board of the Oregon Bankers Association from 1977 to 1989 and served as
its president in 1986/1987. He is Chairman of the Board of Directors of
BancSource, Inc., an OBA for-profit subsidiary. He also served as a
director of the American Bankers Association from 1986 to 1989 and
currently serves as a member of the Board of Directors of each of the six
subsidiary banks of the Company. Mr. Brummel is also President-elect of the
Western Independent Bankers Association.
WILLIAM A. LANSING is President of Menasha Corporation Forest Products
Group, in North Bend, Oregon, where he has been employed since 1970. Mr.
Lansing sits on the board of several state-wide (Oregon and Washington)
timber related associations and has been recognized for his efforts in
community and state affairs by both local and regional organizations.
KENNETH C. MESSERLE sold his share in the family business of Messerle &
Sons, Inc., a cattle and timber corporation, in Coos County. In 1996, he
was elected to the State Legislature for District 48, and re-elected in
1998. Mr. Messerle also serves on the Board of Directors of Lincoln
Security Bank.
<PAGE>
RONALD L. LAFRANCHI is the owner of Ron's Oil Co., a chain of independently
owned, name brand retail gasoline stations he started in 1976. He presently
operates several stations located throughout Oregon, as well as a propane
gas division which serves predominately retail customers.
GLENN A. THOMAS is the owner of Thomas & Son Beverage, Inc., and its
subsidiaries, Thomas & Son Trucking and Thomas & Son Transportation
Systems, in Coos Bay, Oregon. He has been the Oregon Director for the
Rocky Mountain Wholesalers Association, a director and officer of Oregon
Beer & Wine Distributors Association, and a director of National Beer
Wholesalers.
GARY L. WAGGONNER has been a Director of Pacific State Bank since 1987,
joining Security Bank Holding Company's Board in 1999. He currently serves
as Chairman of the Board of Directors of Pacific State Bank, and is a
rancher and timberland manager.
ROBERT L. FULLHART has been a Director of Pacific State Bank since 1989,
joining Security Bank Holding Company's Board in 1997 as a result of the
acquisition of Pacific State Bank. He is the owner of Fullhart Insurance
Agency, which has five offices in Oregon.
During the year ended December 31, 1999 the Board of Directors held 12 regularly
scheduled meetings. All directors attended at least 75 percent of the board
meetings and committee meetings during the year.
COMMITTEES
The Company's Board of Directors has established a Compensation Committee
comprised of William A. Lansing (Chair), Glenn A. Thomas and Gary L. Waggonner.
The Compensation Committee determines the salary of the Chief Executive Officer
and the bonuses and stock option grants to Chief Executive Officer and other
executive officers of the Company.
The Board of Directors also has established a standing Audit Committee
consisting of Kenneth C. Messerle (Chair), Ronald L. LaFranchi and Robert L.
Fullhart. The Audit Committee is responsible for overseeing regulatory
compliance matters, and reviewing periodic examinations by state and federal
regulators of the Company and the subsidiary banks, and other external/internal
audits.
The Board of Directors appointed a Nominating Committee, consisting of Ronald L.
LaFranchi (Chair), William A. Lansing, and Glenn A. Thomas, to recommend
nominees for election of directors at the annual meeting of shareholders.
Shareholders who wish to make recommendations to the Nominating Committee for
directors to be nominated for election at the 2001 annual meeting of
shareholders may do so in writing addressed to the Secretary of the Corporation
at the address indicated above no later than November 5, 2000.
COMPENSATION
Directors of the Company except Charles D. Brummel received $1,000 in
compensation for each meeting of the Board of Directors attended in 1999. There
is no separate compensation for participation in any of the Committees. Payment
was made in the form of Company stock, purchased by the Company from existing
stock on the market.
<PAGE>
EXECUTIVE OFFICERS
Charles D. Brummel is Chief Executive Officer of the Company. Antoinette M.
Poole is Executive Vice President and Chief Operating Officer of the Company.
Ronald L. Farnsworth is Vice President and Chief Financial Officer of the
Company. Naseer M. Nasim is Vice President and Chief Information Officer of
the Company. Executive Officers serve at the discretion of the Board of
Directors.
The following sets forth certain information about the executive officers of the
Company, other than Chuck Brummel:
ANTOINETTE M. POOLE, age 53 serves as the Company's Executive Vice
President and Chief Operating Officer. Prior to fulfilling the
responsibilities of Chief Operating Officer of the Company, she was
Executive Vice President and Loan Administrator of Security Bank, and has
served in a number of other officer positions. She has been employed by the
Company since 1976.
RONALD L. FARNSWORTH, age 29, employed by the Company since 1996, is Vice
President and Chief Financial Officer of the Company. Farnsworth was
previously employed by KPMG Peat Marwick LLP in Portland, Oregon, from 1992
to 1996.
NASEER M. NASIM, age 36, joined the Company in July 1999, and serves as the
Company's Vice President and Chief Information Officer. Nasim has been
involved with the financial industry since 1990. His experience also
includes consultant services to fortune 500 companies, and CEO of AmeriNex,
Inc., and internet service providing company in Santa Clara, California.
COMPLIANCE WITH SECTION 16 FILING REQUIREMENTS
Section 16 of the Securities Exchange Act of 1934, as amended, ("Section 16")
requires that all executive officers and directors of the Company and all
persons who beneficially own more than 10 percent of the Company's Common Stock
file an initial report of their ownership of the Company's securities on Form 3
and report changes in their ownership of the Company's securities on Form 4 or
Form 5. These filings must be made with the Securities and Exchange Commission
and the National Association of Securities Dealers with a copy sent to the
Company.
Based solely upon the Company's review of the copies of the filings, which it
received with respect to the fiscal year ended December 31, 1999, the Company
believes that all reporting persons made all filings required by Section 16 on a
timely basis.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation earned for the years ended December
31, 1999, 1998 and 1997 by each executive officer of the Company receiving over
$100,000 of total compensation during such year:
Annual Compensation Long term
------------------- ---------
compensation awards
-------------------
Number
of
Securities
Other Underlying All other
Name and Position Year Salary(1) Bonus Compensation(2) Options comp (3)
- ----------------- ---- --------- ----- --------------- ------- --------
Charles D. Brummel 1999 $183,343 $-- $22,822 72,450 $71,900
Chief Executive 1998 $166,675 $48,855 $25,692 -- $76,603
Officer 1997 $130,016 $68,684 $12,887 -- $68,943
(1) Includes amounts contributed by the named executive officer to the 401k
plan.
(2) Consisting of Directors fees paid from the subsidiary banks of the Company,
of which Mr. Brummel is a Director, and Company provided auto and spousal
travel.
(3) Consists of accrued earnings related to the Key Executive Deferred
Compensation Plan for the benefit of the named Executive Officer. See
"Other Benefit Plans".
INCENTIVE CASH BONUS PLAN. The Board of Directors of the Company believes that
an incentive bonus based on earnings motivates management to perform at the
highest levels. Management performance has a direct impact on the short-range
and long-range profitability and viability of the institution and an incentive
bonus promotes the retention of qualified management. Directors also believe
that compensation programs with incentive pay as a significant portion of
compensation allow base salaries to remain relatively constant, even during
highly profitable periods, thereby containing salary costs during any less
profitable periods. The management incentive bonus program is at the discretion
of the Board. Specific performance levels and awards are developed by the
Compensation Committee of the Board and approved annually by the Board of
Directors. The size of the total incentive is determined by a formula based upon
the earnings of the Company.
PHANTOM STOCK DEFERRED COMPENSATION PLAN. In 1996, the Company established a
deferred compensation plan for a select group of key employees to provide for
unfunded, non-qualified deferred compensation to assist in attracting and
retaining such key employees and to encourage such employees to devote their
best efforts to the business of the Company. An eligible employee is permitted
to defer up to 20% of that employee's base salary and 100% of any cash bonus,
and is required to defer not less than 2% of base salary and 20% of any cash
bonus. Deferred compensation is credited to the participant's account in the
form of Phantom Stock Units, the number of units being determined by dividing
the amount of the compensation deferred by the base price established annually
by the Board of Directors for that Plan Year's deferrals. The base price of each
unit is the average of the bid and ask prices of the Company's common stock for
the last ten trading days of the preceding calendar year. Distributions to a
participating employee are made in cash only and are distributed over a period
not to exceed 60 months after the earlier of the employee's death, disability,
termination of employment, change of control of the Company or the attainment of
the age specified in the Plan agreement between the employee and the Company.
Upon distribution, the deferred compensation amount is valued by multiplying the
<PAGE>
cumulative number of Phantom Stock Units by the average of the bid and ask
prices of Company common stock on the date of distribution. Currently, Mr.
Brummel is the only participant in the plan.
SEVERANCE AGREEMENT. In addition to Mr. Brummel's regular compensation, the
Company has agreed to pay him additional compensation should his employment with
the Company be terminated under certain conditions. The severance agreement is
effective only if Mr. Brummel's employment is involuntarily terminated in
connection with the merger or sale of the Company, or if he elects to terminate
his employment within one year of a merger or sale. In the event of such a
termination, the Company has agreed to pay Mr. Brummel a sum equal to twelve
times his monthly base salary in effect at the time of the merger or sale. The
base salary includes monthly gross salary but does not include bonuses or other
compensation, plus any deferred or unpaid portion of his annual bonus. If the
severance agreement had been triggered as of December 31, 1999, Mr. Brummel
would have been entitled to a payment of $183,343.
STOCK OPTION PLAN. The Company adopted a combined incentive and non-qualified
stock option plan (the "Plan") effective May 1, 1995, and approved by the
shareholders at the annual shareholders meeting on March 20, 1996. Pursuant to
the Plan, options may be granted at the discretion of the Board of Directors or
such committee as it may designate, to key employees, including employees who
are directors of the Company.
The purpose of the Plan is to advance the interests of the Company and its
shareholders by enabling the Company to attract and retain the services of
people with training, experience and ability and to provide additional incentive
to key employees and directors of the Company by giving them an opportunity to
participate in the ownership of the Company.
The Plan reserves 289,800 shares of the Company's unissued common stock for
possible grants to employees. The purchase price of shares issuable upon
exercise of options is not less than 100% of the fair market value per optioned
share at the time of the grant. Each option granted under the plan is
exercisable for up to ten years following the date of grant. Options generally
become exercisable as to 20% of the shares one year after the date of grant,
with an additional 20% becoming exercisable each year thereafter.
As of December 31, 1999, options to purchase 200,025 shares, adjusted for stock
dividends and splits, were outstanding under the Plan. There were 82,950 options
granted to employees in 1999, no options exercised and 15,750 options
terminated. The following table sets forth information regarding options held by
named executive officers as of February 11, 2000:
Number of Percentage of Exercise
Name Shares Total Options Price Expiration Date
- ---- ------ ------------- ----- ---------------
Charles D. Brummel 144,900 72.4% $6.95 (1) April 30, 2005
to
August 16, 2009
Antoinette M. Poole 2,625 1.3% $8.33 December 30, 2008
Ronald L. Farnsworth 5,250 2.6% $8.33 December 30, 2008
(1) Represents the weighted average exercise price of two separate option
grants.
<PAGE>
The following table sets forth information regarding option holdings for the
year ended December 31, 1999, with respect to the Executive Officer named in the
Executive Compensation summary table:
# of unexercised options Value of unexercised in-the-money
at year end (1) options at year end
--------------- -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Charles D. Brummel 57,960 86,940 $34,776 $8,694
(1)The named Executive Officer has yet to exercise any of the options
granted to him. On December 31, 1999, the fair market value of the
Company's common stock (the fair market value) was $6.00. For purposes of
the previous table, stock options with an exercise price less than the
fair market value are considered to have a value equal to the difference
between the fair market value and the exercise price of the stock option
multiplied by the number of shares covered by the stock option.
OTHER BENEFIT PLANS. The Company sponsors a Key Executive Deferred Compensation
Plan (the ESI Plan) which is a noncontributory defined benefit plan covering a
select group of key management employees. The ESI Plan is an unfunded plan
providing supplementary retirement benefits. Benefits under the ESI Plan are
based on years of service, final average pay and covered compensation. At
December 31, 1999, the ESI Plan covered eight participants, including four
current employees, two former employees with vested rights to future benefits,
and two retirees and beneficiaries receiving benefits. In 1999, the Board of
Directors voted to include Directors fees paid to Mr. Brummel in the average pay
formula for his retirement benefits.
COMPENSATION COMMITTEE REPORT
The intention of the Compensation Committee Report is to describe in general
terms the process the Committee undertakes and the matters it considers in
determining the appropriate compensation for the Company's executive officers,
including the executive officers who are named in the enclosed Summary
Compensation Table (the "Named Executives"). The Company, acting through the
Committee, believes that the Compensation of its Named Executives and other key
personnel should reflect and support the goals and strategies that the Company
has established.
COMPENSATION PHILOSOPHY. The Compensation Committee has two principal objectives
in determining executive compensation (1) to attract, reward and retain key
executive officers and (2) to motivate executive officers to perform to the best
of their abilities and to achieve short-term and long-term corporate objectives
that will contribute to the overall goal of enhancing stockholders value.
ELEMENTS OF EXECUTIVE COMPENSATION. The elements of the Company's compensation
of executive officers are: (1) annual cash compensation in the form of base
salary and incentive bonuses, (2) long-term incentive compensation in the form
of stock options granted under the Company's 1995 Incentive Stock Option Plan;
and (3) other compensation and employee benefits generally available to all
employees of the Company. The Committee believes that the Company's goals are
best supported by attracting and retaining well-qualified executive officers and
other personnel through competitive compensation arrangements, with emphasis on
rewards for outstanding contributions to the Company's success, with a special
emphasis on aligning the interests of executive officers and other personnel
with those of the Company's shareholders.
<PAGE>
STOCK PERFORMANCE GRAPH
The following chart compares the yearly percentage change in the cumulative
shareholder return on the Company's Common Stock during the period beginning
September 13, 1996, when the Company first issued its shares publicly, and
ending December 31, 1999, with (i) the Total Return Index for the NASDAQ Stock
Market(U.S. Companies) as reported by the Center for Research in Securities
Prices and (ii) the Total Return Index for NASDAQ Bank Stocks as reported by the
Center for Research in Securities Prices. This comparison assumes $100.00 was
invested on September 13, 1996, in the Company's Common Stock and the comparison
groups and assumes the reinvestment of all cash dividends prior to any tax
effect.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHICS
12/31/96 12/31/97 12/31/98 12/31/99
-------------------------------------
SBHC $103.03 $151.66 $112.36 $86.79
Nasdaq Composite $108.61 $132.11 $184.47 $342.35
Nasdaq Banks $112.50 $184.04 $162.37 $149.42
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 11, 2000, the shares of common
stock beneficially owned by all of the directors, nominees for election as
directors, and executive officers of the Company. As of that date there were
4,681,122 shares of the Company's common stock issued and outstanding. All
shares are held directly unless otherwise indicated.
Name(1) Number of Percent of
------- --------- ----------
Shares Class
------ -----
Charles D. Brummel (Director/Officer)(2) 123,427 2.64%
(2)
William A. Lansing (Director)(3) *
Kenneth C. Messerle (Director)(4) 8,407 *
Glenn A. Thomas (Director)(5) 10,601 *
Ronald L. LaFranchi (Director)(6) 17.18%
Gary L. Waggonner (Director)(7) *
Robert L. Fullhart (Director)(8) 9,637 *
Antoinette M. Poole (Officer)(9) 33,230 *
Ronald L. Farnsworth (Officer)(10) 4,596 *
Naseer M. Nasim (Officer) *
All Directors and Executive Officers
as a Group (10 persons) 1,018,841(2-11) 21.76%
========= ======
- --------------------
* Less than 1.0%
(1) The business address of all directors and officers is 170 S. Second St.,
Coos Bay, Oregon 97420.
(2) Charles D. Brummel's holdings include 3,176 shares held jointly with his
spouse in his spouse's trust and 65,291 shares in the ESOP (1,225 of which
are allocated to Mr. Brummel's spouse). This amount excludes the 1999 ESOP
allocation as amount of shares allocated in 1999 is not yet known. Also
includes 57,960 shares covered by stock options exercisable in 60 days.
(3) William A. Lansing holds 21,823 shares jointly with his spouse.
(4) Kenneth C. Messerle's holdings include 8,327 shares held jointly with his
spouse and 80 shares held jointly with his grandchildren.
(5) Glenn A. Thomas holds 10,339 shares jointly with his spouse and 262 shares
held jointly with his grandchildren.
(6) Includes 13,141 shares held in a custodial capacity for the benefit of
minor children.
(7) Gary L. Waggonner holds 6,070 shares jointly with his spouse.
(8) Robert L. Fullhart holds 9,637 shares jointly with his spouse.
(9) Antoinette M. Poole includes 250 shares held directly and 27,661 shares in
the ESOP. This amount excludes the 1999 ESOP allocation as amount of
shares allocated in 1999 is not yet known. Also includes 525 shares
covered by stock options exercisable in 60 days.
(10) Ronald L. Farnsworth holds 3,546 shares in the ESOP (1,070 of which are
allocated to Mr. Farnsworth's spouse). This amount excludes the 1999 ESOP
allocation as amount of shares allocated in 1999 is not yet known. Also
includes 1,050 shares covered by stock options exercisable in 60 days.
As of February 11, 2000, the only other person than those named above known
to own more than 5% of the Company's Common Stock is the ESOP, which owned
942,593 shares, or 20.14% of the total shares outstanding. Trustees of the
ESOP are appointed by the Board of Directors and currently consists of
Jim Donnelly, Partner of Moss Adams, North Bend, Oregon, Tim Salisbury,
Chief Financial Officer of Bay Area Hospital, and Marcia Hart, Vice
President and Director of Human Resources for the Company.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and officers of the Company, and members of their
immediate families and firms and corporations with which they are associated,
have had transactions with the Company, including borrowings and investments in
time deposits. All such loans and investments have been made in the ordinary
course of business, have been made on substantially the same terms, including
interest rates paid or charged and collateral required, as those prevailing at
the time for comparable transactions with unaffiliated persons, and did not
involve more than the normal risk of collectibility or present other unfavorable
features. As of December 31, 1999, the aggregate outstanding amount of all loans
to officers and directors was approximately $10,302,000, which represented
approximately 35.9% of the Company's consolidated shareholders' equity at that
date. In addition, the Company had deposits from Directors and Officers totaling
$4,342,000 as of December 31, 1999.
No director or principal officer of the Company has a direct family relationship
with another director or executive officer of the Company.
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are being filed with this Form 10-K405 or incorporated
herein by reference. This list constitutes the Exhibit Index:
Exhibit
3(i) Articles of Incorporation of Security Bank Holding Company *
3(ii) Bylaws of Security Bank Holding Company *
4.0 Specimen Common Stock Certificate *
10.1 Commercial Lease Agreement, dated September 26, 1995, between
George L. and Mary E. Carter and Security Mortgage, a Division
of Security Bank, relating to the Eugene, Oregon, mortgage office *
10.2 Commercial Lease, dated November 18, 1988 between South Coast
Center and Security Bank, relating to the Brookings-Harbor branch *
10.3 Lease Agreement, dated November 1, 1978, between Philip J. and Ann
Keizer and Security Bank, relating to the North Bend branch, and
Assignment of Lease, dated July 25, 1986 *
10.4 Termination Allowance Agreement, dated September 28, 1981, and
amended December 15, 1988, between Security Bank and Charles D.
Brummel *
10.5 Shareholders Agreement between Class A Common and
Class B Common Shareholders of Lincoln Security Bank *
10.6 1995 Stock Option Plan of Security Bank Holding Company *
10.7 1997 Directors Compensation Plan (incorporated by reference to the
Company's registration statement on form S-8 (file No. 333-28095),
declared effective by the Securities and Exchange Commission on
May 30, 1997.
10.8 Schedule of 1991 Incentive Bonus Plan *
10.9 Security Bank Phantom Stock Deferred Compensation Plan *
23.0 Consent of KPMG LLP
27.0 Financial Data Schedule
* Incorporated by reference to the Company's registration statement
on Form SB-1 (File No. 33-80795) declared effective by the
Securities and Exchange Commission on September 12, 1996.
Reports on Form 8-K:
- -------------------
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SECURITY BANK HOLDING COMPANY
By: /s/ CHARLES D. BRUMMEL
--------------------------
Charles D. Brummel, Chairman and Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 21, 2000:
/s/Antoinette M. Poole
- ----------------------
Antoinette M. Poole, Executive Vice President and Chief Operating Officer
/s/Ron L. Farnsworth
- --------------------
Ron L. Farnsworth, Vice President and Chief Financial Officer
/s/William A. Lansing /s/Kenneth C. Messerle
- --------------------------------------- ----------------------
William A. Lansing, Director Kenneth C. Messerle, Director
/s/Glenn A. Thomas /s/Charles D. Brummel
- --------------------------------------- ---------------------
Glenn A. Thomas, Director Charles D. Brummel, Director
/s/Ronald L. LaFranchi /s/Gary L. Waggonner
- --------------------------------------- --------------------
Ronald L. LaFranchi, Director Gary L. Waggonner, Director
/s/Robert L. Fullhart
- ---------------------
Robert L. Fullhart, Director
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Security Bank Holding Company
Coos Bay, Oregon:
We consent to incorporation by reference in the Registration Statements (Nos.
333-28087 and 333-28095) on Form S-8 of Security Bank Holding Company of our
report dated January 28, 2000, relating to the consolidated balance sheets of
Security Bank Holding Company and Subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, which report appears in the December 31, 1999
annual report on Form 10-K of Security Bank Holding Company.
KPMG LLP
Portland, Oregon
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The Consolidated balance sheets and consolidated statements of operations of
the company's form 10K405 for the year to date
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,632
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,060
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,904
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 187,955
<ALLOWANCE> 2,645
<TOTAL-ASSETS> 316,601
<DEPOSITS> 263,969
<SHORT-TERM> 18,718
<LIABILITIES-OTHER> 1,890
<LONG-TERM> 0
0
0
<COMMON> 24,575
<OTHER-SE> 4,143
<TOTAL-LIABILITIES-AND-EQUITY> 316,601
<INTEREST-LOAN> 15,289
<INTEREST-INVEST> 4,668
<INTEREST-OTHER> 948
<INTEREST-TOTAL> 20,905
<INTEREST-DEPOSIT> 7,573
<INTEREST-EXPENSE> 8,089
<INTEREST-INCOME-NET> 12,816
<LOAN-LOSSES> 470
<SECURITIES-GAINS> 186
<EXPENSE-OTHER> 14,724
<INCOME-PRETAX> 2,823
<INCOME-PRE-EXTRAORDINARY> 2,014
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,014
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 7.87
<LOANS-NON> 468
<LOANS-PAST> 771
<LOANS-TROUBLED> 172
<LOANS-PROBLEM> 768
<ALLOWANCE-OPEN> 2,294
<CHARGE-OFFS> 196
<RECOVERIES> 77
<ALLOWANCE-CLOSE> 2,645
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>